Banking Law Prof Blog

Banking Law Prof Quoted in NY Times.com

Banking Law Professor Ann Graham, editor of the Banking Law Prof Blog, has previously analyzed federal preemption in the financial institutions arena and the opinion delivered by the U.S. Supreme Court in Cuomo v. Clearing House Association. See Archived Posts:  Federal Preemption.

Her comments on the 2009 case were quoted in the November 3, 2009, New York Times article by David Streitfeld and John Collins Rudolf, “States Are Pondering Fraud Suits Against Banks.”

Link to the article: http://www.nytimes.com/2009/11/03/business/03suits.html

(ag) Nov. 23, 2009, in Federal Preemption

 

Commenting on Cuomo

A post from Charles Carreon, Attorney, in Tucson, AZ:

"No federal agency should be allowed to market a charter as a get-away-with-it-free card providing immunity from state consumer protection laws." 

Well-said! The unity of banking and the federal government is a self-reinforcing system.  Over-centralization of government is fueled by the power of unlimited credit expansion, which is enabled by a private banking system that makes maximum use of government-provided leverage, that can only be sustained by further expansion of private banking.

(ag) Nov. 4, 2009, in Federal Preemption

CFPA Bill Out of Committee - Preemption Provisions

The House Financial Services Committee concluded its markup of H.R. 3126 which will create a new Consumer Financial Protection Agency (CFPA).   The favorable committee vote was 39-29,  A summary of the preemption provisions of the bill follows:

Subtitle D – Preservation of State Law

National Bank / Federal Thrift Preemption
This legislation will reinstate the preemption standard in Barnett Bank of Marion County, N.A. v. Nelson, permitting the federal regulator to preempt state consumer financial protection laws only after a written finding that the state law “prevents or significantly interferes” with the exercise of powers granted to a federally regulated bank or thrift.  Preemption determinations must once again be made by notice and comment regulation or on a case-by-case basis, and with consultation  with CFPA to ensure that consumers will be protected under federal law if the state law is preempted.

Operating Subisidiaries
The bill reverses Watters v. Wachovia, in which the Supreme Court exempted operating subsidiaries of national banks and federal thrifts (which generally are state incorporated entities) from state consumer protection laws. H.R. 3126 will require state-chartered business entities to comply with state laws.

Enforcement by State Regulators
The bill codifies Cuomo v. Clearinghouse with explicit provision that state attorneys general and other appropriate state regulators are not prevented from enforcing state laws against national banks and federal thrifts. The bill also authorizes state attorneys general to enforce CFPA regulations, after consultation with the CFPA.

Link to full bill summary:  http://financialservices.house.gov/Key_Issues/Financial_Regulatory_Reform/FinancialRegulatoryReform/CFPA_Summary_of_HR_3126.pdf

LInk to CSBS summary:  http://www.csbs.org/Content/NavigationMenu/PublicRelations/CSBSExaminer/Examiner.htm

(ag) Oct. 24, 2009, in Congress, Consumer Protection, Federal Preemption.

W.VA. Attorney General Follows Up on the Cuomo Decision

Before the Supreme Court opinion in Cuomo v. Clearing House Association this spring, the West Virginia Attorney General had been enjoined from suing Capitol One Bank for alleged violations of law relating to its credit card operations.  In light of the Supreme Court ruling in Cuomo that state attorneys general are not prohibited from filing lawsuits against national banks or their operating subsidiaries for alleged violations of non-preempted state laws, the West Virginia Attorney has filed a motion to modify the earlier Order and seeks dissolution of the injunction.

See Capitol One Bank (USA), N.A. v. Darrell V. McGraw, Jr., Attorney General for the State of West Virginia, Civil Action No. 2:08-cv-00165, Motion filed 8/19/09.

(ag) Oct. 7, 2009, in Federal Preemption

Consumer Financial Protection Agency Legislation

Here's what the Conference of State Bank Supervisors (CSBS) reports today about the Consumer Financial Protection Agency (CFPA) debates on the Hill: 

"Chairman Frank Revises Consumer Protection Bill
 
Prior to Wednesday's hearing to gather additional viewpoints on the proposed Consumer Financial Protection Agency (CFPA), House Financial Services Committee Chairman Barney Frank (D-Mass.) released revised draft legislation (H.R. 3126) reflecting a number of changes in response to concerns raised by industry and consumer groups.

CSBS has analyzed the revised bill, noting provisions of interest to state bank regulators. The revised legislation changes the structure of the agency from a five person board to a single director, advised by an oversight board to include the Fed, FDIC, national bank supervisor, NCUA, FTC, HUD, and state representation by the chair of the FFIEC State Liaison Committee.

In  his revised bill, Chairman Frank inserted specific exemptions for certain types of non-financial firms such as retailers, accountants, tax preparation services, real estate brokers and agents, etc.

He also added registration requirements for nonbanks that provide consumer financial products.

The revised bill also changes funding requirements from appropriations and fees and other assessments to having the Federal Reserve transfer 10 percent of total expenses and sets up separate funds within Treasury to cover CFPA expenses for banks vs. nonbanks.

He also set up a dispute resolution mechanism and removed the original requirement that mandated financial institutions providers to offer "plain vanilla" products.

The revised bill maintains the original version's elimination of federal preemption of state consumer protection laws and allows states to go beyond federal standards.

CSBS's support of the measure is contingent on these provisions (elimination of federal preemption and preservation of the "floor not ceiling" provisions) and maintaining a significant role for state regulators in terms of coordination and consultation in rulemaking and examinations.  Additionally, CSBS supports examination by the prudential regulator.  Chairman Frank has indicated he plans to mark up the bill the week of October 12. "

Link to CSBS Examiner:  http://www.csbs.org/Content/NavigationMenu/PublicRelations/CSBSExaminer/Examiner.htm

(ag) Oct. 2, 2009, in Consumer Protection, Financial Regulatory Reform, Federal Preemption
 

Systemic Risk Regulation for the EU

The European Union is proposing to establish a new European Systemic Risk Board (ESRB), an independent multi-member board to focus specifically on identifying risk to the stability of the EU financial system as a whole. 

 

This contrasts with proposals currently circulating in the U.S. to concentrate systemic risk regulation in the Federal Reserve, which already has a lot on its plate with regulating monetary policy.  Further, concentrating systemic risk regulation in the hands of one agency forfeits the benefits of different viewpoints and increases the risk that the Fed, acting alone, will miss the mark – as it did on former Federal Reserve Board Chairman Alan Greenspan’s watch when it held interest rates too low for too long, contributing to easy credit which fueled the subprime lending orgy.

 

LInk to Speech by Link to Speech by
Lucas Papademos, Vice-President of the European Central Bank, "Financial Stability and Macro-prudential Supervision: Objectives, Instruments and the Role of the European Central Bank, Address at Center for Financial Studies Conference on the ECB and Its Watchers XI, Goethe University, Frankfurt, Germany (Sept. 4, 2009), http://www.bis.org/review/r090908c.pdf

 

(ag) Sept. 28, 2009, in Financial Regulatory Reform

 

Eighth Circuit Recognizes Limits on Federal Preemption

The U.S. Court of Appeals for the Eighth Circuit recently ruled that national bank assignees or purchasers of mortgages are not completely shielded from state law violation claims by a blanket claim of federal preemption.  The case is Thomas v. U.S. Bank. 

Plaintiff/Appellants are Missiouri homeowners who received "high loan-to-value" second mortgages (reflecting total debt of 125% of the value of their homes) from FirstPlus Bank, a federally insured state-chartered bank which has since failed.  Their mortgages were purchased or assumed by other banks, including some national banks.

Plaintiffs claim that the loans violated state law, specifically the Missouri Second Mortgage Loans Act (MSMLA) which limits the type and amount of closing costs and fees that can be imposed on residential second mortgages secured by MissourI real estate.

The national banks removed the case to federal court and successfully moved for dismissal of the case, contending that state law claims were completely preempted by the Depository Institutions Deregulation and Monetary Control Act (DIDA). 

On appeal, the Eighth Circuit reversed and remanded to state court for trial.  The Eighth Circuit opinion distinguished preemption under the National Bank Act (NBA) and the limited scope of preemption provided by the plain language of DIDA.  NBA would have applied if national banks had originated the loans.  DIDA applies to loans originated by statte-chartered banks.

State law claims in this case are not preempted because state law usury limits are higher than the ceiling provided under federal law -- even though these claims are for non-refundable broker's fees that exceeded MSMLA limits and for closing costs and fees that exceeded the fees actually charged by third-party providers where the originator FirstPlus retained the difference.

The state law remedy -- forfeiture of interest and twice the interest paid -- is not preempted here -- if the state law claims can be established at trial.

Link:  http://www.aba.com/aba/documents/GeneralCounsel/BankingDocket/ThomasvUSBankNational.pdf

(ag) Sept. 5, 2009, in Federal Preemption, Lending Issues, Consumer Protection, Predatory Lending, Dual Banking

American Banker ViewPoint Articles on Supreme Court Preemption Opinion

We'd rather litigate than adopt consumer protections.  That's what some of these opinion pieces are saying, including today's American Banker article by Cheyenne Hopkins, "A Preemption of Clarity," a collection of remarks by lawyers. 

Of course, one or two comments and opinion letters do go beyond whining to look at how banks can use the Cuomo v. Clearing House opinion to foster their business and their image.  Stephan L. Jouret, in his July 10, 2009, ViewPoint piece, "Ruling in Cuomo Can Be Pro-Industry," reminds us that "banking isn't a zero sum game, and what's good for states and consumers isn't necessarily bad for the financial institutions industry." 

The flip side of that is also true.  Just because the OCC "won" a series of court cases on preemption, doesn't mean they were doing the right thing for the national economy, for the banking industry, or for consumers.  Lawyers, including those at big law firms and at the OCC who pursued these cases and who are now griping about the Cuomo decision, seem to have lost sight of the world beyond the courthouse and outside the Beltway. 

In my opinion, the best response to Cuomo from national banks and the OCC would be to start beefing up their consumer protections, instead of looking for ways to pick apart Cuomo and see how little they will have to do for the benefit of consumers.  A bank's best defense against litigation is to serve all of its customers well and to make that a prominent part of its mission.  And for those lawyers who really want to serve their clients' long-term best interests, it would be refreshing to see them helping banks do that.

(ag) July 14, 2009, in Federal Preemption, Supreme Court

What Exactly Is a Dual Banking System?

One reader of this blog asks, "What exactly is a dual banking system?"  So here's the background:

In the U.S. today, we have two types of bank charters:  1.  Each State has the authority to charter and supervise banks within its borders through a State Banking Commissioner and State Banking Department (although states may consolidate regulation of banking with other industries such as insurance and name their supervisory department something different); and 2.  At the federal level, the Office of the Comptroller (OCC) has the authority to issue national bank charters and has exclusive supervisory authority (sometimes called "visitorial power") over national banks.

National banks trace their existence and powers to the National Bank Act of 1864.  The national bank charter was instituted as a means of raising funds for the Civil War.  State chartered banks were already in existence and continued on a parallel track with national banks. Many present-day legal disputes over the powers of national banks go back to the original language of the National Bank Act of 1864.  Of course, the National Bank Act has been amended repeatedly since then and the business of banking has evolved into many areas that could not have been foreseen in 1864.

FDIC statistics show that as of 3/31/09, there are 1,519 commercial banks (not thrifts or credit unions or other lending institutions but insured deposit-taking institutions with a bank charter) operating as national banks and 5,518 commercial banks operating as state-chartered banks.  The organizers of a bank can choose whether to operate under a state or national charter when the bank is formed and they can switch charters from state to national or national to state at any time (unless they are in poor financial condition and a charter change will not be approved). 

What factors influence choice of charter? 

• Those who choose a national charter often cite nationwide uniformity of regulation; thus most really large banks hold a national charter. 
• Those who choose a state charter are often smaller community banks that focus on a smaller geographic area and like the idea of going to the state capital to deal with a banking department that is smaller and more accessible, with decisions made on the basis of state-wide conditions.  However, there are also many smaller community banks holding national charters. 
• A comparison of charter fees, assessment fees, perceived expertise of examination staff, prior good or bad experience with the regulator, and perceived strictness of regulation may influence charter choice. 
• Because both national and state regulators are funded by fees and assessments paid by the banks they regulate, regulators in effect compete to get more and larger entities to choose their charter.  In the worst case, this can lead to a "captive" regulator who trades on "lax regulation" to gain in the turf war.  Commentators cite the former Federal Home Loan Bank Board that chartered federal savings and loan associations up until the S&L crisis of the 1980s as the poster child for a "captive" regulator that kowtowed to the industry it was supposed to regulate.  As a result, Congress dissolved this agency and created the Office of Thrift Supervision ("OTS"). 
• Nationwide banking operation, whether under a national or state charter, has brought convenience and lower cost financial products to consumers.  It is possible to operate a nationwide banking system under a charter from one state, with authorized branches in other states.  This does require complying with laws in each state of operation and increases the cost of compliance.  On the other hand, the costs of trying to evade state consumer protection have been quite high for consumers and the economy.  
• Over the past five years, the Office of the Comptroller of the Currency ("OCC"), the chartering authority for national banks, and the Office of Thrift Supervision ("OTS"), the chartering authority for federal thrifts, have responded to their industries by aggressively claiming that more and more state laws are preempted by the National Bank Act.  Former Comptroller of the Currency John D. Hawke openly marketed the national bank charter as a way to escape state consumer protection laws.  Subsequent Comptrollers have continued to pursue litigation to shield national banks from state laws.  
• Two recent Supreme Court decisions have addressed federal preemption. 
  •  In Watters v. Wachovia (2007), the Supreme Court allowed a mortgage lending corporation (not a depository institution but a state corporation) to exempt itself from state consumer protection law by becoming an operating subsidiary of a national bank.  Thus on one day, the entity was required to submit to registration requirements under Michigan law, but on the day after it was acquired as a subsidiary of a national bank doing exactly the same mortgage lending it had previously previously conducted in the State of Michigan, it placed itself beyond the reach of Michigan consumer protection law.  Although the OCC claimed exclusive "visitorial power" over subsidiaries of national banks to the same extent it possessed exclusive "visitorial power" over the banks themselves, the OCC never had the staff, the funding, or the schedule to go into operating subsidiaries to check on their lending practices as they did for banks themselves.  Wachovia (failed), Wells Fargo, Citibank (troubled), HSBC all had subprime mortgage lending subsidiaries that were exempt from state consumer protection laws.  One has to question why the OCC expended its resources fighting the State's efforts to enforce consumer protection laws instead using those resources to cooperate with the States to ensure consumer protection. 
  • In Cuomo v. Clearing House Association (2009), the Supreme Court found that the OCC had overstepped its legal authority in claiming that a State Attorney General could not sue a national bank for violations of valid state consumer protection and anti-discrimination laws.  The OCC had claimed that it was the only enforcer of consumer protection for national banks -- with the obvious problem that it was not equipped to do that job.  This month, the Supreme Court ruled that a State Attorney General can sue a national bank to enforce state consumer protection laws. 
  • The Obama administration's draft legislation presented to Congress this week (which I have outlined in a previous post) would reverse the Watters decision and allow States to pass and enforce consumer protection laws which are expressly not preempted by federal law, even when the State law sets a higher consumer protection standard than federal law, as long as the State law applies equally to State banks and National Banks (and subsidiaries).
  • The draft legislation would adopt the Cuomo decision, making it clear that State Attorneys General can sue national banks to enforce valid state consumer protection laws.  
• Some people as whether the State banking charter has any value today.  They may also ask why we do not have a single federal banking charter and a single national bank regulator.  Stated another way, why should we continue to have a "dual banking system," with the ability to choose either a State or a National Bank charter?  
  • Our nation is based on a balance between State and federal powers.  Americans have never wanted the federal government to overpower the ability of States to address issues particular to their citizens.
  • The Constitution's Tenth Amendment recognizes "federalism" and the state/federal balance by providing that powers not expressly granted to the federal government are reserved to the States and the people.
  • Congress and the Supreme Court have expressed reluctance to preempt state laws unless there is a strong reason to do so,
  • State banks have been described as "laboratories of innovation."  The State banks originated checking accounts, the first NOW accounts which paid interest, and interstate branching.  A State legislature can move more quickly than Congress to adopt new practices and products that apply to a more limited area.  If successful, the innovations can spread, and if not, they can be changed.
  • Having a single charter and a single regulator would create a monopoly, which is less efficient and less responsive that when we have a choice between state and federal regulation.  A single regulator can be coopted more easily by industry.  Absolute power corrupts.  There would be few checks on a single regulator's mistaken understanding of the economy or failure to regulate appropriately.  With the dual banking system, state regulators can catch issues that might be missed by a single federal regulator.
  • State and federal regulators have a long, successful track record of cooperating in bank examinations and regulations.  Cooperative pooling of resources leads to better oversight coverage.  Incorporating both State and national perspectives leads to a more comprehensive understanding of the economic costs and benefits involved in banking regulation.   

Link to FDIC's website for a very simplified timeline of banking from the 1700s to the 2000s:  http://www.fdic.gov/about/learn/learning/when/1700s.html

(ag) July 2, 2009, in Dual Banking, Federal Preemption 

Analyzing the Consumer Financial Protection Agency Act of 2009

      On June 30, 2009, the administration delivered to Congress legislation which provides details behind the broad Financial Regulatory Reform White Paper.  The draft “Consumer Financial Protection Agency Act of 2009” raises many critical issues, including:

 

•  Mission and Scope of Authority.   The CFPA’s broad mission is to protect consumers of all types of financial products and services.  This represents an effort to regulate unregulated financial institutions, to centralize consumer financial protection so as to minimize inconsistencies in regulation, and to address the reality that consumer protection issues have been marginalized by agencies with other responsibilities such as safety and soundness.

      A key concern here is whether consumer financial protection regulation can or should be compartmentalized.  Prudential regulation, which emphasizes financial solvency, must take account of the consumer protection performance of a financial institution to insure long-term viability.   Safety-and-soundness and consumer protection have long been regarded by the best bank regulators as complementary rather than contradictory.

A positive aspect of the proposal is the regulation of previously unregulated providers of financial products and services.  This is long overdue.  Had all mortgage brokers and lenders been subject to a level playing field of consumer protection oversight, many of the abuses leading to the subprime mortgage meltdown might have been controlled. 

      
• Composition of the new CFPA Board.  The five-member governing Board will include four public members appointed by the President and confirmed by the Senate as well as the Director of the National Bank Supervisor, another new agency combining the responsibilities of the Office of the Comptroller of the Currency (“OCC”) and the Office of Thrift Supervision (“OTS”).  One can question whether the new national bank regulator is given a disproportionate voice at CFPA, with only “consultation” to be provided by State regulators, the FDIC, and the Federal Reserve.

• Staffing.  Each of the existing federal bank regulatory agencies will transfer its current consumer protection division to the CFPA.  This proposal assures expertise and minimizes start-up time for the new agency.  The greatly expanded jurisdiction over new entities, products, and services will, however, require the new agency to recognize and allocate staff resources among at least three models for regulation.  I describe these as:  1.  “examination-driven” regulation, which is highly staff intensive because it is based on periodically scheduled on-site visitation;                     2.  “complaint-driven” regulation, which is less staff intensive and less comprehensive because it calls for regulatory attention only when triggered by a certain level of consumer complaints; and 3.  “report-driven” regulation,  like the current review of Home Mortgage Disclosure Act (“HMDA”) data by the Federal Reserve Board which analyzes information required to be submitted and produces a report lagging real time by almost two years. 

• Funding.  The Plan outlined in the White Paper calls for the CFPA to be “independent” of the industries it regulates.  As background, the existing federal banking agencies are funded, not through taxpayer monies but through charter fees and assessments raised from the entities they regulate.  This provides a perverse incentive for agencies to compete with each other to provide the most favorable, least restrictive regulation in order to increase the number and size of institutions they regulate.  “Captive” regulators have marketed their charters as a way to escape consumer protection statutes. 

Details provided in the draft legislation call for the agency to be funded through Congressional  appropriation, authorizing Congress to say how much the agency can spend; however, the legislation goes on to provide that the CFPA shall recover the amount of funds expended through collection of annual fees or assessments on covered entities.  Will continuing the practice of funding a regulatory agency from its regulated constituents result in “capture” of this new agency?

• Clarification of Federal Preemption.  The proposed legislation reestablishes balance between State and federal authority over consumer protection.  States are expressly permitted to enact and enforce consumer protection laws that are more stringent than federal laws.

The 2007 Supreme Court decision in Watters v. Wachovia would be overturned by making State consumer protection laws applicable to national banks and their operating subsidiaries to the same extent that they apply to state banks.  State consumer protection laws are declared not inconsistent with federal law and thus not preempted if they afford consumers greater protection than federal law, making federal consumer protection laws “the floor rather than the ceiling.” 

Industry representatives are sure to complain that the result will be fifty different state standards which will increase the costs of financial products and inhibit innovation.  These arguments must be judged in light of the high costs to all consumers and to our economy which resulted from aggressive preemption of state consumer protection laws.  Large nationwide financial institutions have the capability to research and coordinate legal requirements as they did prior to 2004 when the pace of federal preemption as a means of escaping state consumer protection laws accelerated.

The 2009 Supreme Court decision in Cuomo v. Clearing House Association is affirmed with language defining “visitorial powers” of the national bank regulator.  State attorneys general are expressly authorized to bring lawsuits to require national banks to produce records for investigations into violations of State consumer laws and to enforce any applicable federal or State law.

•  Establishment of a Victims Relief Fund.  Providing that civil money penalties will go into a fund available for restitution rather than into general revenue is a positive step. 

• Weighing Costs and Benefits of Regulation.  CFPA must, in the exercise of its rulemaking authority, consider potential benefits and costs to consumers and regulated entities.  Troubling language in the statute provides that CFPA may not declare a consumer financial product or service unlawful unless it “causes or is likely to cause substantial injury to consumers which is not reasonably avoidable by consumers and such substantial injury is not outweighed by countervailing benefits to consumers or to competition.”  Under this standard, “teaser rate” mortgages would not be unfair to consumers who could avoid injury by refusing the loan. 

 

(ag) July 1, 2009, in Congress, Economy, Federal Banking Regulators, Federal Preemption

Arthur Wilmarth Interview on Cuomo Decision

National Public Radio talked with George Washington University Law Professor Arthur Wilmarth yesterday.  He is a highly regarded proponent of the dual banking system and an opponent of aggressive federal preemption in the financial institutions arena, as well as a prolific author of Law Review articles in the banking law field. 

Link to interview:  http://www.npr.org/templates/story/story.php?storyId=106062165

(ag) June 30, 2009, in Federal Preemption/Dual Banking

Analysis of the Cuomo Opinion

Today, the U.S. Supreme Court delivered its opinion in Cuomo v. Clearing House Association, upholding the power of States to enforce their own non-preempted consumer protection laws by bringing suit against national banks and their affiliates.

This opinion was one of the very last to be published before the end of the Supreme Court’s 2008 term.  Justice Scalia authored the majority opinion, joined by Justices Stevens, Souter, Ginsburg, and Breyer.  Justice Thomas filed an opinion concurring and part and dissenting in part, joined by Chief Justice Roberts and Justice Alito.

The majority opinion finds that the Office of the Comptroller of the Currency (“OCC”), the chartering authority and federal regulator of national banks, promulgated a regulation and an interpretation of its regulation that do not comport with the National Bank Act and are, therefore, invalid. 

States do have the power to sue national banks for violation of state consumer protection laws.  

 The background of the case involved an investigation by the New York Attorney General, triggered by data indicating racial disparities in loans by national banks headquartered in New York made to white borrowers and loans the same banks granted to African-American borrowers.  Rather than respond to the Attorney General’s request for information that might explain these racial disparities, the national banks, including Wells Fargo, HSBC, J.P. Morgan Chase, and Citibank, and others that are members of the financial institution trade group, Clearing House Association, L.L.C., filed suit to block his investigation.  The OCC and the national banks agreed that state consumer protection and anti-discrimination laws in this case were valid and not preempted, but they said the State could not enforce its laws against national banks.  The OCC claimed that lawsuits against national banks were preempted because only the OCC had “visitorial power” over national banks and their operating subsidiaries.

The Supreme Court declared that the OCC’s regulation purporting to preempt State law enforcement is not a reasonable interpretation of the National Bank Act.  The majority opinion makes a distinction between “visitorial powers,” which the National Bank Act gives exclusively to the OCC, and the State’s power to enforce the law.  The majority opinion gives cursory acknowledgment to the Chevron Doctrine, under which courts defer to reasonable agency interpretations of statute, but goes on to say that “the presence of some uncertainty does not expand Chevron deference to cover virtually any interpretation of the National Bank Act.  We can discern the outer limits of the term “visitorial powers” even through the clouded lens of history.  [Visitorial powers] do not include, as the Comptroller’s expansive regulation would provide, ordinary enforcement of the law.”

Justice Scalia’s majority opinion recognizes that when a State sues a national bank, the normal rules governing litigation protect against overbearing.  The majority opinion did find that the State’s power to issue subpoenas under its own authority, rather than that of the court, is preempted.  As a result, the Attorney General’s letter request for information was preempted to the extent that it was a veiled threat to exercise subpoena power the Supreme Court declares preempted.  

The majority opinion turns on the term “visitorial powers” in the National Bank Act, coupled with the Supreme Court’s extensive analysis of the historical reach of “visitorial powers” and prior Supreme Court opinions, such as Guthrie v. Harkness, 299 U.S. 148 (1905) and First National Bank in St. Louis v. Missouri, 263 U.S. 640 (1924) , which upheld the right of a private citizen and the right of a State Attorney General, respectively, to bring suit against national banks to enforce State law.  The majority did not engage in a formal Chevron analysis and did not flatly say that the OCC’s interpretation was “unreasonable,” although that is the implication.  The Supreme Court says that “the presence of some uncertainty does not expand Chevron deference to cover virtually any interpretation of the National Bank Act.”   The majority opinion does not invoke the presumption against preemption and finds it “unnecessary to do so in giving force to the plain terms of the National Bank Act.”  On the other hand, the Court says, “Neither should the incursion that the Comptroller’s regulation makes upon traditional state powers be minimized.”  The majority opinion also notes that, “The consequences of the regulation also cast doubt upon its validity.”  It is reassuring to note that the Court does look at context and effect and does not merely rubberstamp an agency’s regulations.  The Court endorses cooperation between federal and state regulatory structures, saying, “This system echoes many other mixed state/federal regimes in which the Federal Government exercises general oversight while leaving state substantive law in place.”  

 The reach of Watters v. Wachovia, 550 U.S. 1 (2007), is strictly limited by Cuomo:  “The sole question was whether operating subsidiaries of national banks enjoyed the same immunity from state visitation.  The opinion addresses and answers no other question.”

Interestingly, Justice Ginsburg authored the Watters opinion, which upheld an OCC regulation invoked against a State banking commissioner attempting to enforce a state registration requirement against a state-chartered mortgage lender which became an operating subsidiary of a national bank to evade state consumer protection regulation.  Justices Breyer, Souter, Kennedy, and Alito joined the majority in the Watters case.  Justice Stevens filed a blistering dissent in Watters, joined by Justices Scalia and Chief Justice Roberts.  Justice Thomas took no part in the Watters case.

Justice Thomas’s dissenting opinion in Cuomo would have found the term “visitorial powers” ambiguous and allowed the OCC free rein to interpret that statutory term under the Chevron Doctrine.  The dissent relied on National Cable & Telecommunications Association v. Brand X Internet Services, 545 U.S. 967 (2005), for the proposition that:  “A court’s prior judicial construction of a statute trumps an agency construction otherwise entitled to Chevron deference only if the prior court decision holds that its construction follows from the unambiguous terms of the statute and thus leaves no room for agency discretion.”  Justice Thomas thus dismissed Guthrie and St. Louis, discussed above.  Justice Thomas would not require a clear statement from Congress before allowing a federal agency to preempt state consumer law.

My analysis:  The Cuomo opinion must be read in light of the subprime lending crisis which has bloomed into a recession after the commencement of this case.  This case was brought for the express purpose of blocking State investigation into abusive lending.  Unchecked abuse is exactly what happens when a powerful federal agency crusades to enlarge its own jurisdiction and protect rather than regulate the industry it oversees.  Common sense has indicated for at least the last five years that the OCC has neither the staff nor the inclination to enforce consumer protection laws.  How could it not have been apparent to Congress and the courts that acquiescing in this agency’s aggressive efforts to prevent any other entity doing so would have disastrous results for consumers and for the economy?

As Congress now turns its attention to designing the optimal regulatory structure for financial institutions, one can hope that they will not ignore these lessons: 

• The dual banking structure, with equal standing for state and national charters, is an essential balancing component within our national economy.  
• State and federal agencies can and do cooperate in consumer protection and in bank regulation.  The long history of successful cooperative regulation should preclude any suggestion that the federal government should stand in the way of state consumer protection laws and enforcement. 
  
• No federal agency should be allowed to market a charter as a get-away-with-it-free card providing immunity from state consumer protection laws. 
  
• If the state/federal balance is restored, it will provide checks against any one agency or any one type of charter ignoring consequences for consumers and for the economy.
  

The Cuomo opinion reassures us that States can adopt and enforce consumer protection laws evenhandedly with respect to all financial institutions, regardless of charter.  Federal agency and financial institution resources that have, until now, been devoted to fighting consumer protection laws should now be invested in protecting consumers from financial abuse.

(ag) June 29, 2009, in Federal Preemption

Supreme Court Overturns OCC's Preemptive Regulation in Cuomo v. Clearing House Association

The U.S. Supreme Court released its opinion in Cuomo v. Clearing House Association this morning.  The good news for States and for consumer protection is that the decision invalidates an Office of the Comptroller of the Currency ("OCC") regulation to the extent it would have prohibited a State Attorney General from going to court to enforce valid state consumer protection and anti-discrimination statutes against national banks.

Finally, the Supreme Court has found that there is some "outer limit" to the OCC's preemptive authority, which has proceeded over the past 10 years to aggressively undercut the dual banking system and the power of the States to protect their own citizens from abusive lending practices.

Link to Supreme Court opinion:  http://www.supremecourtus.gov/opinions/08pdf/08-453.pdf

A more complete analysis of the Cuomo opinion and a comparison with Watters v. Wachovia will follow later today.

(ag) June 29, 2009, in Federal Preemption/Supreme Court

President Obama Asks Agencies To Review Preemption Actions

Although he stopped short of requiring federal agencies to repeal overly aggressive preemption regulations and letter rulings issued during the previous administration, President Obama did ask the agencies to review their preemption actions in light of the important role the states occupy. 

Key provisions of the letter include the following excerpt:

"In recent years, however, notwithstanding Executive Order 13132 of August 4, 1999 (Federalism), executive departments and agencies have sometimes announced that their regulations preempt State law, including State common law, without explicit preemption by the Congress or an otherwise sufficient basis under applicable legal principles.

The purpose of this memorandum is to state the general policy of my Administration that preemption of State law by executive departments and agencies should be undertaken only with full consideration of the legitimate prerogatives of the States and with a sufficient legal basis for preemption. Executive departments and agencies should be mindful that in our Federal system, the citizens of the several States have distinctive circumstances and values, and that in many instances it is appropriate for them to apply to themselves rules and principles that reflect these circumstances and values. As Justice Brandeis explained more than 70 years ago, '[i]t is one of the happy incidents of the federal system that a single courageous state may, if its citizens choose, serve as a laboratory; and try novel social and economic experiments without risk to the rest of the country.'"

Link to Obama Letter on Preemption: http://www.whitehouse.gov/the_press_office/Presidential-Memorandum-Regarding-Preemption/

(ag) June 9, 2009, in Federal Preemption

Why Federal Regulation Should Not Be "The Answer"

I admit it:  I’m a proponent of the Dual Banking System.  We can all see flaws in the U.S. financial institution regulatory structure that contributed to the current economic crisis.  I am deeply concerned, however, that many reform proposals suggest that a single federal prudential regulator will solve all issues.  This is a recipe for disaster. 

Concentrating oversight power in the hands of one regulator means eliminating checks and balances.  We need the additional resources of a strong state bank charter and conscientious state  regulation.   Disturbingly, the Office of the Comptroller of the Currency has, for the past several years, been using federal preemption as a marketing tool to convince banks that a national bank charter is the only way to go because it enables a national bank, its operating subsidiaries, and its agents (for example, State Farm agents that contract to market national bank products) to escape state consumer protection laws.  We’ve seen a lot of winking and nodding at testimony  that the federal bank regulators have the staff, the resources, and the will to enforce state consumer protection laws “for the states” so the states don’t have to worry about that. 

The recent GAO Report on “Systemic Risk:  Regulatory Oversight and Recent Initiatives to Address Risk Posed by Credit Default Swaps” shows reality:  “One AIG, one OTS examiner.”  In the financial institutions arena, such a philosophy is clearly less effective that the Texas Ranger motto:  “One Riot, one Ranger.”  

Link:  http://www.gao.gov/new.items/d09397t.pdf

(ag) 5/15/09 in “Federal Preemption”

No Federal Preemption for State Farm - The Exclusive Agent Issue

The U.S. District Court for the Southern District of Ohio, Eastern Division, has ruled that an Opinion Letter from the Chief Counsel for the Office of Thrift Supervision is not effective to preempt state law as it affects exclusive agents for a federal thrift. 

The case is State Farm Bank, FSB v. John B. Reardon, Superintendent of the Ohio Division of Financial Institutions.  The court granted Reardon's motion for summary judgment on Oct. 10, 2007.  The Opinion acknowledges that OTS may have the authority to extend federal preemption to agents of federal depository institutions; however, OTS failed to comply with the Administrative Procedure Act in attempting to preempt an Ohio law requiring independent mortgage brokers to obtain licenses from the State before marketing first and second mortgages.

The claim of preemption in this case was based on a letter from the OTS Chief Counsel which concluded that the laws of twelve states were preempted to the extent that they required licensing of mortgage brokers acting as third-party contractors soliciting mortgage loans for a federal savings association.  The court called this a "dramatic change in the federal regulatory scheme."  The court rejected claims of conflict or field preemption, noting that OTS does not propose to issue federal licenses to mortgage brokers, but instead would create a new category of mortgage brokers not licensed by either the federal or state government -- a particularly distasteful scenario in light of the mortgage lending meltdown we are now experiencing.

The court in this case distinguished the U.S. Supreme Court decision in Watters v. Wachovia, which found that state laws are preempted as to national bank operating subsidiaries.  The court here rejected an OTS claim that these exclusive agents are "like" operating subsidiaries because the federal thrift is not required to and does not hold any ownership interest in or control (other than contractually) over these agents.  This court quoted extensively from the dissenting opinion in Watters.

This court also rejected the decision of the U.S. District Court for the District of Connecticut in State Farm Bank FSB v. Burke, 445 F.Supp.2d 207 (2006), which also involved preemption of nearly identical state law as applied to the lending activities of State Farm Bank's exclusive agents.  Are we headed back to the Supreme Court to resolve the exclusive agent question?   Watch this space!

Link to Opinion:  http://www.aba.com/aba/documents/GeneralCounsel/BankingDocket/StateFarm.pdf

(ag) Nov. 15, 2007, in Federal Preemption

For a More Candid View . . .

Take a look at the Bank Lawyer's blog take on Ms. Williams' recent speech, discussing federal preemption and the Wachovia v. Wattters decision.  He calls 'em like he sees 'em.

LInk:  http://www.banklawyersblog.com/3_bank_lawyers/2007/07/a-twist-on-watt.html

(ag) July 17, 2007, in Federal Preemption

Julie Williams Talks About the Watters Decision, Subprime Lending, and Consumer Protection

OCC's First Deputy Comptroller and Chief Counsel Julie Williams spoke to the New York Bankers Association this week. 

First, she addressed the Supreme Court decision in Watters v. Wachovia.  She says it's not new news.  She also says "move on". 

With respect to mortgage lending through subsidiaries of national banks, the OCC now clearly has responsibility to police predatory lending & deal with consumer protection issues. 

Ms. Williams calls for cooperation between state and federal regulators.

LInk:  http://www.occ.treas.gov/ftp/release/2007-72a.pdf

(ag) July 13, 2007, in Consumer Protection/Predatory Lending/Preemption

CSBS Asks Congress to Clarify Consumer Protection in Light of Federal Preemption

Steven Antonakes is the Massachusetts Banking Commissioner, Chairman of the State Liaison Committee and newest voting member of the Federal Financial Institutions Council (FFIEC).  The Conference of State Bank Supervisors (CSBS) reports his testimony on their behalf before the House Financial Services Committee at the Hearing on "Improving Federal Consumer Protection in Financial Services." 

Not surprisingly Antonakes addressed the consumer protection concerns following the expansion of federal preemption to include almost all state efforts to protect their citizens from predatory mortgage lending if a bank or its subsidiary is involved.  Here's what he had to say to Congress:  “The current state of confusion is not acceptable.”

Antonakes emphasized the value of the dual banking system, pointing out that “nearly every consumer protection regulation that exists at the federal level, or that Congress is currently contemplating, has its roots at the state level.”

Link to Testimony:  http://www.house.gov/apps/list/hearing/financialsvcs_dem/htantonakes061307.pdf

Link to CSBS Newsletter:  http://www.csbs.org/Content/NavigationMenu/PublicRelations/CSBSExaminer/ExaminerMain.htm

(ag) June 21, 2007, in Consumer Protection, Federal Preemption

Be Careful What You Ask For . . .

It's the old story about the dog chasing the car.  What will he do if he catches it?

The OCC may find itself -- and the other banking agencies -- in a similar quandary as a result of the Watters v. Wachovia decision which exempts operating subsidiaries of national banks from state consumer protection laws.  Congressman Barney Frank, Chairman of the House Financial Services Committee, and Congressman John Dingell, Chairman of the House Energy and Commerce Committee, sent a joint letter dated May 11, 2007, to the federal banking regulators and the Federal Trade Commission, suggesting that if the federal banking agencies don't step up to the plate with stronger consumer protections following the exclusion of the states from this field, Congress may give this authority to the FTC instead of the federal banking agencies.

Link to letter:  http://www.house.gov/apps/list/press/financialsvcs_dem/press051107.shtml

(ag) May 14, 2007, in Consumer Protection, Federal Banking Agencies, Federal Preemption