Supreme Court Considers States’ Role in Regulating National Banks

In the near future, the Supreme Court is expected to issue a ruling in Cuomo v. Clearing House Association, a case that addresses whether state officials are permitted to enforce state laws against national banks. The legal dispute initiated in 2005 when New York Attorney General Eliot Spitzer began investigating the residential real estate lending practices of certain national banks.

Spitzer reviewed a Federal Reserve report which included the race, sex, and age of loan applicants. The data indicated that banks issued a disproportionately high percentage of high interest loans to minorities. Attorney General Spitzer sent out letters of inquiry cautioning banks that their actions may have been in violation of federal and state antidiscrimination laws, and requested that the banks provide information about loans made in New York.

In response to Spitzer’s request, the Clearing House Association (“CHA”), which consists of several national banks, sought a court order to stop Spitzer’s investigation and enforcement efforts. The CHA relied on an interpretation issued by the Office of the Comptroller of the Currency which interpreted the National Bank Act (“NBA”) to prevent states from exercising enforcement authority over national banks. Following the CHA’s lawsuit, the OCC initiated a similar lawsuit to stop the investigation. Following the consolidation of these cases, the consolidated lawsuit was heard by a district court in New York and the Second Circuit Court of Appeals, both of which ruled in favor of CHA and the OCC. Specifically, these courts held that the OCC’s interpretation concerning enforcement of the NBA was reasonable and was entitled to judicial deference. Following these decisions, Andrew Cuomo, Eliot Spitzer’s successor, appealed to the Supreme Court.

At oral argument, which was held earlier this year, Cuomo asserted that the State of New York had sufficient authority to enforce its state laws against the defendant banks. Specifically, Cuomo argued that: (1) the OCC’s interpretation of the NBA would alter the balance of power between the state and federal government; (2) exclusive federal enforcement against national banks interferes with the state’s ability to protect the public from abusive and discriminatory lending practices; (3) the decision by the lower courts conflicts with the Supreme Court’s previous decisions; and (4) the prior decisions by federal Courts of Appeal on this issue weighed against deferring to federal regulation over state statutes.

In response, the CHA and the OCC argued that the OCC’s interpretation was reasonable and that Congress had properly delegated its authority to the OCC. The CHA and the OCC also argued that the OCC’s interpretation is consistent with Congressional policy allowing national banks to operate strictly under federal law. Further, the CHA and the OCC argued that Cuomo had failed to demonstrate that the OCC was unable to protect state consumers’ interests and enforce fair lending laws.

If the Court rules in favor of Cuomo and the states, national banks could be subject to varied regulation from state to state and lending practices could be adversely affected. Alternatively, a decision by the Court in favor of the CHA and the OCC would substantially limit the role of state governments in regulating national banking institutions. The Court’s decision is expected to be announced in the coming months.

Authored by Matthew Horwitz and Layla Dotson.

Posted by: Matthew J. Horwitz

Categories: Bankruptcy & Banking Law