The Supreme Court ruled Monday that states could enforce some of their consumer protection laws against national banks, a move that could lead to tougher oversight than federal regulators have provided in recent years.
The 5-4 decision in a case involving attempts by New York’s attorney general to enforce fair-lending laws was praised by consumer and civil rights groups, which have accused federal regulators of being lax in policing banks chartered by the federal government.
“This puts more consumer cops on the consumer crime beat,” said Edmund Mierzwinski, consumer program director at the U.S. Public Interest Research Group. “The federal regulators have demonstrated they’re just having doughnuts in the coffee shop.”
Banking trade groups, however, warned that the ruling could lead to a confusing patchwork of enforcement levels in states that could cause national banks to offer fewer products, such as credit cards.
“This will make it difficult to serve consumers in today’s high-tech, mobile society where people and bank services move constantly across state lines,” said Edward L. Yingling, president of the American Bankers Assn.
The ruling has limited effect because it applies only to a small number of state laws, such as those dealing with discrimination in lending practices, including predatory lending. Most other state laws affecting national banks are enforced by federal officials.
And it affects only the approximately 1,600 national banks, not the larger number of state banks that are subject to the laws of the states in which they’re chartered.
But it is significant because it reverses a trend of states losing legal battles with federal officials over banking regulatory oversight.
The case’s importance also could be amplified by President Obama’s recent proposal to create a Consumer Financial Protection Agency that would allow states to enact and enforce tougher consumer protection laws than the federal government.
“If Obama’s plan goes forward, it will broaden and strengthen this decision dramatically,” Mierzwinski said.
The case involved an attempt by former New York Atty. Gen. Eliot Spitzer in 2005 to investigate bank lending practices, such as whether a disproportionately large percentage of high-interest mortgages were made to minorities.
After Spitzer sent letters of inquiry to national banks, including Wells Fargo & Co., Citibank and JP Morgan Chase & Co., a bank consortium called the Clearing House Assn. filed suit to stop the investigation.
The Treasury Department’s Office of the Comptroller of the Currency, which regulates national banks, also filed suit, arguing that Spitzer was improperly encroaching on its rule under an 1864 law that it was the only entity with the “visitorial power” to examine such banks. The suits were combined and upheld by lower courts.
But Spitzer’s successor, Andrew Cuomo, appealed to the Supreme Court, arguing in part that the federal agency’s interpretation in effect shielded national banks from states’ enforcing their own laws to protect consumers and prohibit discrimination.
In the 5-4 decision, Justice Antonin Scalia split with his conservative colleagues, joining the liberal and moderate members in ruling the Office of the Comptroller of the Currency had overstepped its bounds.
In writing the court’s decision, Scalia said law enforcement investigations were different from bank examinations.
“If a state chooses to pursue enforcement of its laws in court, then it is not exercising its power of visitation and will be treated like a litigant,” Scalia said.
A state would have to meet a higher standard than a regulatory examiner, he wrote, because it would have to survive motions to dismiss the case by the bank.
The state, he wrote, also would be subject to oversight by judges who “are trusted to prevent ‘fishing expeditions’ or an undirected rummaging through bank books and records for evidence of some unknown wrongdoing.”
The attorneys general of the 49 other states and the District of Columbia supported New York. They argued in a brief that the “fallout from the subprime lending debacle demonstrates the need for more oversight and consumer protection enforcement in the area of mortgage lending.”