Federalism and Consumer Protection - Cuomo v. The Clearinghouse Association
Financial industry regulation is a classic illustration of federalism at work. Federalism is has been called an American innovation.
“Before 1787, political thinkers did not believe that two governments could have direct authority over the same people.” Richard Briffault , Federalism, in The Oxford Companion to American Law.
The “two” governments here are the federal government and the individual states. Every government has the authority to enact and enforce laws within its jurisdiction, absent constitutional restrictions on that power, and as a result conflict “is perpetually arising and will probably continue to arise, as long as our system exists.” McCullough v. Maryland (U.S. Supreme Court 1819). These conflicts require the courts to determine whether states are permitted to enforce their laws in instances where there is overlap or conflict with federal law. Many of these court decisions have involved attempts by the states to regulate national banks and other nationally-chartered financial institutions.
The United States Supreme Court (USSC) will decide another such case this Term, in Cuomo v. The Clearinghouse Association, L.L.C. . This litigation arose out of attempts by the Attorney General of New York to investigate possible violations of New York fair lending laws in the real estate lending practices of several national banks and their operating subsidiaries. The investigation was instigated by published data indicating what the Attorney General of New York claimed showed “a significantly higher percentage of high-interest home mortgage loans are issued to African-American and Hispanic borrowers than to white borrowers.”
The federal regulator of national banks, the Office of the Comptroller of the Currency (OCC), sued the New York State Attorney General to obtain an injunction against pursuing this investigation. The OCC prevailed at trial and on appeal in the courts below, and New York sought and was granted certiorari from the USSC to review the case.
“Preemption jurisprudence entangles the judiciary in the difficult task of ensuring the survival of two fundamental but inherently conflicting values embodied in the U.S. Constitution: how does the Constitution permit states, as sovereign powers, to regulate local conduct, but yet enable the national government to preempt parochial state regulation that harms the national interest? . . . Under the Commerce Clause, Congress has extensive power to enact federal legislation that supercedes state regulation, although that power is limited in part by the Tenth Amendment, which reserves certain powers to the states. In cases where Congress has enacted legislation in an area within its authority, the judiciary’s task is to ascertain whether Congress intended to preempt state action in that area in accordance with the Supremacy Clause of the Constitution. “ (I am quoting myself here, but the American Bar Association owns the copyright. Copies of survey articles published in The Business Lawyer in 2006 and 2007 that include sections written by me discussing in detail national bank preemption jurisprudence and litigation and other topics touched upon in this note are available on my website, www.bwplawyer.com)
In the case of national banks, there is extensive legislative history and jurisprudence making it quite clear that national banks are generally protected from state interference with their operation, and that the OCC has been delegated quite extensive authority to regulate those banks and fence out the states. In 2004 the OCC adopted regulations that it characterized as simply codifying and clarifying the existing state of the law of preemption as it applies to national banks. The states and many commentators characterized the regulations as a power grab.
The 2004 OCC regulations took an expansive view of the concept of “visitorial powers”, which the National Bank Act reserves exclusively to the OCC, and the OCC has been aggressive in suing to prevent states from investigating or enforcing potential violations of any state laws against national banks (certain state laws, such as escheat laws, are excepted). The OCC has sued Michigan to prevent enforcement of a registration requirement against a mortgage subsidiary of Wachovia National Bank (upheld by the USSC in Watters v. Wachovia, 2007). It has successfully prevented New Hampshire from enforcing their prepaid card consumer protection laws against programs operated by national banks and against their agents (SPGGC v. Ayotte, 1st Circuit, 2007). The Cuomo case is the latest public skirmish.
The issues that will be addressed by the USSC in the Cuomo certiorari are (1) whether the 2004 OCC regulations were an abuse of the authority of the OCC under the National Bank Act, and (2) specifically whether the enforcement of otherwise non-preempted state laws against a national bank falls within the definition of “visitation” in the National Bank Act under previous USSC decisions.
The first question will require application of Chevron U.S.A., Inc. v. Natural Res. Def. Council (U.S. Supreme Court 1984) ((“where Congress has committed to the head of a department certain duties requiring the exercise of judgment and discretion, his action thereon, whether it involves questions of law or fact, will not be reviewed by the courts unless he has exceeded his authority or . . . his action was clearly wrong”). The second question is equally technical.
Highly-paid legal acrobatics aside (unfortunately not including me), this case, like all preemption cases, is fundamentally about the proper allocation of power in our federal system. The OCC believes that it can best do its job and national banks can best fulfill their role if the states are kept away from them. The states, New York in this case, believe that they have an important role to play in protecting their citizens by applying local consumer protection laws to national banks.
Perhaps the best description of the states’ argument is from the petition for certiorari filed by New York: “...The practical effect of accepting OCC's construction of § 484 is to eradicate all government enforcement of state laws as to national banks. It is no answer that the Comptroller is able to enforce such laws, because OCC is not designed or equipped to enforce States' consumer protection laws against national banks, has no record of doing so, and has shown no intention of changing its traditional indifference.”
Similarly, the Consumer’s Union has written to Treasury Secretary Geithner urging him to overturn the OCC interpretation of the National Bank Act and allow enforcement against national banks by states of consumer protection regulation. Consumers Union argues that lax regulation of the real estate lending activities of national banks and their subsidiaries by the OCC caused much of the subprime mortgage debacle, and allowing states to participate in regulating national banks would “increase substantially the efforts to monitor and enforce higher standards against the banks that are at the heart of the current financial crisis”.
At the risk of quibbling, it is also true that many of the participants in the subprime mortgage market were state-regulated entities, and the states didn’t manage to prevent abuses in their realm of regulation either. New Century Financial Corporation, a subprime lender, was regulated by California and was one of the first to fail, in April 2007, and by no means is the only state-regulated subprime entity to fail due to poor (if not reckless and unconscionable) underwriting.
I cannot predict how the USSC will come down in the Cuomo case, but I find it extremely interesting that it has taken this case at a time when the failures of the regulatory system and calls and proposals for reform are salient. In light of the current environment and some likelihood of Congressional action on regulatory reform in the near term, the USSC likely will keep any decision narrow in application, as is its habit anyway. However, the OCC (or any successor regulator) may eventually find its wings melted by Congress even if the USSC does not do so. The OCC suffers from too many symptoms of “regulatory capture” by the industry it regulates (not to mention self-congratulatory hubris), and given the recent reintroduction of this nation to the inherent tendencies of market capitalism, the inefficiencies of overlapping state enforcement would seem a blessing. Or not. More on this later.
“Before 1787, political thinkers did not believe that two governments could have direct authority over the same people.” Richard Briffault , Federalism, in The Oxford Companion to American Law.
The “two” governments here are the federal government and the individual states. Every government has the authority to enact and enforce laws within its jurisdiction, absent constitutional restrictions on that power, and as a result conflict “is perpetually arising and will probably continue to arise, as long as our system exists.” McCullough v. Maryland (U.S. Supreme Court 1819). These conflicts require the courts to determine whether states are permitted to enforce their laws in instances where there is overlap or conflict with federal law. Many of these court decisions have involved attempts by the states to regulate national banks and other nationally-chartered financial institutions.
The United States Supreme Court (USSC) will decide another such case this Term, in Cuomo v. The Clearinghouse Association, L.L.C. . This litigation arose out of attempts by the Attorney General of New York to investigate possible violations of New York fair lending laws in the real estate lending practices of several national banks and their operating subsidiaries. The investigation was instigated by published data indicating what the Attorney General of New York claimed showed “a significantly higher percentage of high-interest home mortgage loans are issued to African-American and Hispanic borrowers than to white borrowers.”
The federal regulator of national banks, the Office of the Comptroller of the Currency (OCC), sued the New York State Attorney General to obtain an injunction against pursuing this investigation. The OCC prevailed at trial and on appeal in the courts below, and New York sought and was granted certiorari from the USSC to review the case.
“Preemption jurisprudence entangles the judiciary in the difficult task of ensuring the survival of two fundamental but inherently conflicting values embodied in the U.S. Constitution: how does the Constitution permit states, as sovereign powers, to regulate local conduct, but yet enable the national government to preempt parochial state regulation that harms the national interest? . . . Under the Commerce Clause, Congress has extensive power to enact federal legislation that supercedes state regulation, although that power is limited in part by the Tenth Amendment, which reserves certain powers to the states. In cases where Congress has enacted legislation in an area within its authority, the judiciary’s task is to ascertain whether Congress intended to preempt state action in that area in accordance with the Supremacy Clause of the Constitution. “ (I am quoting myself here, but the American Bar Association owns the copyright. Copies of survey articles published in The Business Lawyer in 2006 and 2007 that include sections written by me discussing in detail national bank preemption jurisprudence and litigation and other topics touched upon in this note are available on my website, www.bwplawyer.com)
In the case of national banks, there is extensive legislative history and jurisprudence making it quite clear that national banks are generally protected from state interference with their operation, and that the OCC has been delegated quite extensive authority to regulate those banks and fence out the states. In 2004 the OCC adopted regulations that it characterized as simply codifying and clarifying the existing state of the law of preemption as it applies to national banks. The states and many commentators characterized the regulations as a power grab.
The 2004 OCC regulations took an expansive view of the concept of “visitorial powers”, which the National Bank Act reserves exclusively to the OCC, and the OCC has been aggressive in suing to prevent states from investigating or enforcing potential violations of any state laws against national banks (certain state laws, such as escheat laws, are excepted). The OCC has sued Michigan to prevent enforcement of a registration requirement against a mortgage subsidiary of Wachovia National Bank (upheld by the USSC in Watters v. Wachovia, 2007). It has successfully prevented New Hampshire from enforcing their prepaid card consumer protection laws against programs operated by national banks and against their agents (SPGGC v. Ayotte, 1st Circuit, 2007). The Cuomo case is the latest public skirmish.
The issues that will be addressed by the USSC in the Cuomo certiorari are (1) whether the 2004 OCC regulations were an abuse of the authority of the OCC under the National Bank Act, and (2) specifically whether the enforcement of otherwise non-preempted state laws against a national bank falls within the definition of “visitation” in the National Bank Act under previous USSC decisions.
The first question will require application of Chevron U.S.A., Inc. v. Natural Res. Def. Council (U.S. Supreme Court 1984) ((“where Congress has committed to the head of a department certain duties requiring the exercise of judgment and discretion, his action thereon, whether it involves questions of law or fact, will not be reviewed by the courts unless he has exceeded his authority or . . . his action was clearly wrong”). The second question is equally technical.
Highly-paid legal acrobatics aside (unfortunately not including me), this case, like all preemption cases, is fundamentally about the proper allocation of power in our federal system. The OCC believes that it can best do its job and national banks can best fulfill their role if the states are kept away from them. The states, New York in this case, believe that they have an important role to play in protecting their citizens by applying local consumer protection laws to national banks.
Perhaps the best description of the states’ argument is from the petition for certiorari filed by New York: “...The practical effect of accepting OCC's construction of § 484 is to eradicate all government enforcement of state laws as to national banks. It is no answer that the Comptroller is able to enforce such laws, because OCC is not designed or equipped to enforce States' consumer protection laws against national banks, has no record of doing so, and has shown no intention of changing its traditional indifference.”
Similarly, the Consumer’s Union has written to Treasury Secretary Geithner urging him to overturn the OCC interpretation of the National Bank Act and allow enforcement against national banks by states of consumer protection regulation. Consumers Union argues that lax regulation of the real estate lending activities of national banks and their subsidiaries by the OCC caused much of the subprime mortgage debacle, and allowing states to participate in regulating national banks would “increase substantially the efforts to monitor and enforce higher standards against the banks that are at the heart of the current financial crisis”.
At the risk of quibbling, it is also true that many of the participants in the subprime mortgage market were state-regulated entities, and the states didn’t manage to prevent abuses in their realm of regulation either. New Century Financial Corporation, a subprime lender, was regulated by California and was one of the first to fail, in April 2007, and by no means is the only state-regulated subprime entity to fail due to poor (if not reckless and unconscionable) underwriting.
I cannot predict how the USSC will come down in the Cuomo case, but I find it extremely interesting that it has taken this case at a time when the failures of the regulatory system and calls and proposals for reform are salient. In light of the current environment and some likelihood of Congressional action on regulatory reform in the near term, the USSC likely will keep any decision narrow in application, as is its habit anyway. However, the OCC (or any successor regulator) may eventually find its wings melted by Congress even if the USSC does not do so. The OCC suffers from too many symptoms of “regulatory capture” by the industry it regulates (not to mention self-congratulatory hubris), and given the recent reintroduction of this nation to the inherent tendencies of market capitalism, the inefficiencies of overlapping state enforcement would seem a blessing. Or not. More on this later.
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