Over the last several years, courts across the country, including the U.S. Supreme Court, have issued decision after decision favoring the Office of the Comptroller of the Currency and its rulemakings regarding the preemption authority of national banks. Recently, however, the U.S. Supreme Court finally ended the winning streak for preemption in ruling for the State of New York in Cuomo v. The Clearing House Association, LLC, et al. The high Court overturned the U.S. Court of Appeals for the Second Circuit and invalidated a portion of the OCC’s rule at 12 C.F.R. § 7.4000 relating to visitorial powers over national banks and their operating subsidiaries. The Court’s decision means that states retain the right to bring judicial enforcement actions against national banks for violations of non-preempted state laws, including state fair lending laws. Although the Court technically ruled in favor of the states, the Court’s decision is rather limited and, for practical purposes, does not by itself have a significant effect on national banks. However, when considered in the context of the current economic crisis and several recent statements from President Obama’s Administration, the cumulative effect may signify a reversal, or at least a slowing, of the trend in favor of preemption.
The Cuomo case arose from former New York Attorney General Eliot Spitzer’s attempt to investigate, through letters of inquiry, possible racial discrimination in connection with the residential real estate lending practices of several national banks and their operating subsidiaries based on data made public by the banks under the federal Home Mortgage Disclosure Act. Subsequently, the OCC sued Spitzer to enjoin his investigation, as did The Clearing House Association (CHA), 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 OCC regulations. The federal district court deferred to the OCC’s regulation at 12 C.F.R. § 7.4000 in both cases, and Spitzer appealed. The Second Circuit consolidated the cases, substituted current New York Attorney General Andrew Cuomo for Spitzer, and upheld the lower court’s injunction barring Cuomo from investigating national banks and their operating subsidiaries for alleged violations of fair lending laws. The appellate court accorded Chevron deference to the OCC’s visitorial powers rule at 12 C.F.R. § 7.4000. The appellate court deemed the OCC rule a reasonable interpretation of Section 484(a) of the National Bank Act regarding limitations on visitorial powers, and found that the New York Attorney General could not investigate national banks and their operating subsidiaries.
The high Court reversed. The majority declined to extend Chevron deference to the OCC’s visitorial powers rule and determined that “the unmistakable and utterly consistent teaching of our jurisprudence, both before and after enactment of the National Bank Act, is that a sovereign’s “visitorial powers” and its power to enforce the law are two different things. There is not a credible argument to the contrary. And contrary to what the [OCC]’s regulation says, the National Bank Act pre-empts only the former.” Justice Antonin Scalia, who wrote the majority opinion, focused on the idea that according visitorial authority to the federal government does not prevent states from enforcing their own laws. In furtherance of this view, the majority noted that the OCC’s visitorial powers regulation produces the “bizarre” result that state law is substantively valid, but states are precluded from enforcing their own laws. The majority concluded that the OCC “erred by extending the definition of ‘visitorial powers’ to include ‘prosecuting enforcement actions’ in state courts.” However, the Court declined to construe this provision broadly and found that the New York Attorney General’s letters of inquiry, backed by an implicit threat to issue a subpoena if the banks failed to comply, were not permissible law enforcement actions exempt from the limits on visitorial power under Section 484(a). Therefore, the Court’s ruling was somewhat limited in that it upheld the injunction with respect to the issuance of subpoenas, but held that the Attorney General is not precluded from bringing judicial enforcement actions. In reaching this conclusion Justice Scalia and the majority expressly declined to invoke a presumption against preemption, and reaffirmed the holding in Watters v. Wachovia, which related to the general supervision and control over a subsidiary of a national bank, which “are worlds apart from law enforcement.”
Justices John Paul Stevens, David Souter, Ruth Bader Ginsburg and Stephen Breyer joined Justice Scalia in the majority opinion. Justice Clarence Thomas filed an opinion concurring in part and dissenting in part, in which Chief Justice John Roberts, Anthony Kennedy and Samuel Alito joined. Justice Thomas and the dissenting justices would have accorded Chevron deference to the OCC’s visitorial powers rule. The dissenters found that the term “visitorial powers” is ambiguous and subject to various interpretations, and that the OCC adopted a reasonable interpretation of the term.
Although the Cuomo court came out in favor of the states, it carefully limited its decision in several important respects. The decision broadens the tools available to the states to enforce their laws with respect to national banks in that states were previously precluded from enforcing certain laws with respect to national banks altogether, and now they can enforce non-preempted state laws through a judicial proceeding. However, the states’ enforcement authority is limited in that they may not use subpoena power to investigate national banks. Instead, they must have enough evidence to file a judicial proceeding and survive a motion to dismiss. Further, the Cuomo decision does not affect the scope of state laws that are preempted with respect to national banks. Cuomo relates only to the states’ ability to enforce non-preempted state laws. The scope of laws that are preempted with respect to national banks remains the same. Similarly, states are still prohibited from exercising visitorial powers over national banks with respect to any law that is preempted.
Nonetheless, Cuomo does seem to chip away, even if only slightly, at the foundation of national bank preemption. Prior to Cuomo, national banks enjoyed comprehensive and for the most part unchallenged preemption of state laws affecting lending. The OCC strengthened national bank preemption by issuing its preemption rule in 2004. National bank preemption was further bolstered with the Court’s 2006 decision in Watters that state law is preempted with respect to national bank operating subsidiaries to the same extent as the parent national bank. Since then, however, several significant changes have occurred that may presage a reversal to this trend. First and foremost is the current financial crisis that was caused in large part by subprime mortgages. As a result of this crisis, consumer advocates and legislators have decried the lack of effective regulation of the consumer credit industry and have called for increased supervision and scrutiny.
Additionally, President Obama released a Memorandum regarding preemption of state law by federal agencies in which he stated that executive departments and agencies should undertake preemption of state law “only with full consideration of the legitimate prerogatives of the States and with a sufficient legal basis for preemption.” Specifically, President Obama directs executive departments and agencies to “review regulations issued within the past 10 years that contain statements in regulatory preambles or codified provisions intended by the department or agency to preempt State law.” It is unclear what action, if any, the Obama Administration intends to take with respect to these reviews, but this section of the Memorandum appears to capture the OCC’s 2004 preemption rulemaking. Finally, the Obama Administration recently proposed a massive overhaul of the financial regulatory system, including the creation of a Consumer Financial Protection Agency.
The Administration’s proposal includes several provisions that would dilute preemption authority for federal depository institutions. The proposal would give state attorneys general the ability to investigate federal depository institutions by way of subpoena, which would broaden the enforcement authority granted to states in Cuomo. Additionally, the proposal provides that consumer protection provisions in state consumer laws of general application, including any law relating to unfair or deceptive acts or practices, any consumer fraud law and repossession, foreclosure, and collection law apply to federal depository institutions, potentially giving states the ability to enact back-door restrictions on federal depository institutions under the guise of unfair or deceptive acts or practices.
In sum, although Cuomo appears limited in effect, when considered in the current economic and regulatory context, it may signal a retreat from the previously unfettered preemption for national banks.
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.