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For all of us who are (ahem) less than satisfied with the vigor of the US Federal Government’s prosecution and enforcement of banking laws against large financial institutions, the US Supreme Court on Monday bucked 145 years of tradition to deliver an important and far reaching opinion that falls squarely on the side of greater accountability.
In Cuomo v. Clearing House Association (PDF), the court struck down a regulation by the US Treasury Department’s Office of the Comptroller of the Currency (OCC) that prohibited enforcement of state banking laws against national banks.
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.
The court found that while a state’s ‘visitorial’ powers of investigation into financial practices remain preempted by the 1864 Federal statute, these visitorial powers do not include the power of a state to enforce its own laws, so a state’s Attorney General can still bring suit against national financial institutions to enforce the state’s consumer protection laws.
The decision, in Cuomo v. Clearing House Association, was a surprise victory for consumer groups and state officials because their repeated attempts to challenge the National Bank Act of 1864 have nearly always been rejected in court. The ruling will allow state attorneys general in certain cases to sue any of the country’s 1,500 national banks, including major divisions of Citigroup Inc., Bank of America Corp., J.P. Morgan Chase & Co. and Wells Fargo & Co.
“With this decision, the court has recognized that fair lending and consumer protection — the cornerstones of a sound economy — require the cooperative efforts of both the states and the federal government,” New York Attorney General Andrew M. Cuomo said in a statement.
The Supreme Court ruling will likely free state prosecutors to bring cases against national banks for alleged violations of fair-lending laws, such as charging minorities more money for loans or refusing to offer loans in certain neighborhoods, a practice known as “red-lining.” The ruling could also allow courts to issue search warrants that allow state attorneys general to search for records at national banks.
Not only is Monday’s decision an important victory in the ongoing battle to prevent large financial institutions from flouting state consumer protection and civil rights laws, but the opinion also has the effect of significantly limiting the ability of the Federal Government to shield the big banks from the consequences of their unlawful actions.
“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.”
No longer can the big banks hide behind the security of lax of Federal oversight, but must now contend with 50 separate state Attorneys General all vying for their pounds of flesh. If the lawsuits in the 90’s against Big Tobacco are any indication, Big Banking could now be in for a very rough ride.
The Clearing House decision also has positive implications for new financial oversight legislation planned by the Obama Administration.
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.
It remains to be seen, of course, just how serious the Obama Administration is about putting its money where its mouth is on financial oversight, but Monday’s ruling is an important signal that the Court will not stand in the way of greater participation by state based watchdogs.
Finally, while the court’s bucking of a 145 year tradition to find in favor of consumers and against the banks is certainly notable, perhaps the most surprising part of the 5-4 decision is which Justices made up the majority.
SCALIA, J., delivered the opinion of the Court, in which STEVENS, SOUTER, GINSBURG, and BREYER, JJ., joined.
In this case at least, it appears Justice Scalia’s longstanding interest in the promotion of states’ rights has trumped his natural corporatist inclinations.
Strange days indeed.