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National Banks in State Crosshairs: Supreme Court to Decide Whether to Bless State Enforcement Action
By Meghan Musselman

In recent years, the battle lines have been drawn over the ability of national banks and other federally chartered institutions to preempt state laws, with federal institutions and their regulators pitted against consumer advocates and state attorneys general. Just two years ago, the U.S. Supreme Court in Watters v Wachovia N.A. upheld the ability of national banks and their operating subsidiaries to preempt substantive state laws. Now, the high court is poised to decide whether state regulators can take enforcement action against such federally chartered entities when the regulator is concerned about violations of state law.

In April, the U.S. Supreme Court heard oral arguments in Cuomo v. The Clearing House Association, LLC, et al. In Cuomo, the high court will consider the validity of the Office of the Comptroller of the Currency’s visitorial powers rule at 12 CFR § 7.4000, which provides that the OCC has exclusive visitorial powers with respect to national banks.

In 2005, former New York Attorney General Eliot Spitzer began investigating evidence of possible racial discrimination in connection with the residential real estate lending practices of several national banks and their operating subsidiaries based on data submitted by the banks under the federal Home Mortgage Disclosure Act. Spitzer sent letters of inquiry to the banks, noting that the disparities could violate federal and state anti-discrimination laws. Subsequently, the OCC, the regulator of national banks, sued Spitzer to enjoin his investigation, as did The Clearing House Association, a consortium of national banks. The OCC and the CHA argued that Spitzer’s investigation constituted an unlawful exercise of visitorial power over the national banks and their subsidiaries in violation of the National Bank Act and the OCC regulation. The federal district court deferred to the OCC’s regulation in both cases, and Spitzer appealed. The U.S. Court of Appeals for the Second Circuit consolidated the cases, substituted current New York Attorney Andrew Cuomo for Spitzer, and upheld the lower court injunction stopping Cuomo from investigating national banks and their operating subsidiaries for alleged violations of fair lending laws. The appellate court also deferred to the OCC’s visitorial powers rule. The appellate court deemed the OCC rule a reasonable interpretation of Section 484(a) of the National Bank Act, which limits visitorial powers over national banks, and agreed that the New York Attorney General had no authority to investigate national banks and their operating subsidiaries.

On appeal, the Supreme Court will look at whether it too should defer to the OCC’s visitorial powers rule, resulting in preemption of New York’s efforts to investigate national banks. During oral argument, several justices raised questions concerning the effect of state regulation on national banks. During the State of New York’s argument, Justice Stephen Breyer focused on the difficulty national banks would face if 50 state attorneys general could investigate them in addition to federal regulators. Chief Justice John Roberts appeared to agree with this point, noting that preempting the state’s power to enforce is less intrusive than preempting the state’s substantive law.

The justices also focused on the meaning of Section 484 of the National Bank Act. Justice Anthony Kennedy indicated during the State of New York’s argument that Section 484 appears to grant exclusive visitorial authority to the OCC, although Chief Justice Roberts commented that the language of Section 484 is not unambiguous. Additionally, Justice Antonin Scalia asked the State of New York to explain why Congress would have included the exemption in Section 484(b) for state law enforcement of unclaimed property and escheat laws if Congress did not intend Section 484(a) to provide for exclusive visitorial authority by the OCC.

The justices explored the issue of enforcement preemption, as distinguished from the more common issue of substantive state law preemption. During the OCC’s argument, Justice Ruth Bader Ginsburg asked counsel for the OCC for examples where state law controls, but where federal law precludes individual states from enforcing those laws. Counsel for the OCC cited Section 85 of the National Bank Act, which provides interest rate authority for national banks derived from the law of the state in which the bank is located. Justices Ginsburg and Scalia both criticized this example because it is not state law applying of its own force. Rather, it is state law converted to federal law. Counsel for the OCC argued that if the high court allowed the New York Attorney General’s investigation to proceed, it could result in the state sovereign reviewing the adequacy of the banks’ lending criteria, a function reserved to the federal sovereign. Scalia interjected and asked what incentive the federal government has to enforce state laws.

Counsel for the CHA began his argument by citing a discussion about Section 484 and visitorial powers from the Court’s 2007 decision in Watters. In Watters, the Court ruled that the National Bank Act and OCC regulations preempt state mortgage lender licensing laws with respect to an operating subsidiary of a national bank to the same extent that the National Bank Act preempts those laws with respect to its parent national bank. Justice Ginsburg interrupted and identified any mention of Watters as inapposite, as Watters dealt with a plainly visitorial activity (i.e., real estate lending, when conducted by a national bank, is immune from state visitorial control) and any mention of the Watters visitorial powers discussion outside of that context is inapplicable.

The final key line of questions pertained to whether the New York Attorney General could ever take action, either by subpoena or filing a lawsuit, that would not fall under the umbrella of visitorial powers. In other words, would the National Bank Act permit the state’s actions under some other, non-visitorial power reserved to the states? To that end, Justice Scalia asked whether there is a difference between enforcing a state law through visitation and enforcing outside visitation. Justice David Souter posed a similar question, asking whether it is possible to have two very similar lawsuits that seek different remedies and, by virtue of the different remedies sought, one lawsuit would be visitorial and one would be non-visitorial. It appeared from this line of questioning that the justices were genuinely seeking clarification and had not yet taken a position on this issue. Counsel for the CHA responded that any time a sovereign goes to court to enforce a statute, regardless of the remedies, the action is visitorial in nature.

It is far from clear how the Court will rule in Cuomo. The current economic crisis has increased scrutiny of banking regulation and may cut in favor of an increased enforcement role for states, particularly as consumer advocates and state attorneys general have made great hay of the fact that federal regulators fell down on the job in their responsibility to protect consumers from predatory and overreaching lending practices. Additionally, it does not appear that the Court will simply reiterate or reinforce the position it took in Watters. In Watters, the Court addressed the ability of national banks to preempt substantive state law. In Cuomo, the Court is looking at the issue of enforcement preemption. State law is not preempted; rather, the state’s ability to enforce its own laws is preempted. As noted above, Justice Scalia in particular seemed skeptical of charging the federal banking regulators with responsibility for enforcing state law. Finally, although it was unclear from oral argument how most justices will align in Cuomo, it appears that Chief Justice Roberts and Justice Ginsburg may reverse the respective positions they took in Watters. Justice Ginsburg authored the majority opinion in Watters, favoring increased preemption authority for national banks. However, in oral argument, she indicated that the Watters decision is inapplicable in Cuomo. Chief Justice Roberts, who joined the dissent in Watters in favor of states’ rights, appeared to sympathize with the argument that state regulation of national banks would be overly burdensome. Further, Justice Clarence Thomas recused himself from the Watters case, but will participate in Cuomo. Thus, it does not appear that we can predict how the Court will rule based on how the justices came down in Watters. A decision is expected in early summer.

Meghan Musselman is an associate in the Maryland office of Hudson Cook, LLP. Basis Points readers can reach Meghan at 410.865.5403 or by email at mmusselman@hudco.com.

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