Senator Chris Dodd’s decision to retire from politics has caused many to conclude that he will not have sufficient clout to assure the creation of a Consumer Financial Protection Agency. That may be. Or perhaps as Roll Call suggested, Senator Dodd might have agreed to step aside in exchange for a promise that he be the first person to head the new agency. Who knows? Perhaps it does not matter. Dramatic change is on the way, and nothing is likely to stop it.
Whether we get a CFPA or not, one shield for national banks is melting away. The preemption defense is dying a slow death. Just a little over one year ago, national banks could count on federal regulators to stand by their side to defend against attacks from state attorneys general. In 2004, the OCC had issued a rule establishing areas of state law that do not apply to national bank lending and deposit-taking activities. It also confirmed that the OCC as the exclusive supervisory authority for national bank activities. Click here for the regulation. According to the OCC, if a state AG claimed a bank was violating its state law, it was the OCC and no one else which had the power to enforce the law against the bank. The state AG’s office could not ask for information, it could not compel testimony, it could not require licenses, and it could not enforce even its own state laws against a national bank.
The world changed a lot in the past year. First, on May 20, 2009, President Obama issued a memorandum entitled “Preemption” which gave us a good clue about where things were headed. The memorandum curtailed “regulatory preemption”. It directed federal departments and agencies to ensure that any preemptive regulations, including those promulgated during the past ten years, are “justified under legal principles governing preemption.” In other words, the President was making it clear that his executive branch was going to be reluctant to interfere with state regulators.
A month later the U.S. Supreme Court took its turn at eroding the preemption defense in the Cuomo v. Clearing House Association, LLC case. That case started when Elliot Spitzer, the former AG of New York, sent letters to several national banks demanding information about their lending practices. He wanted to evaluate whether the banks had violated New York’s fair-lending laws. Mr. Spitzer threatened that if the banks did not voluntarily honor his request, he would issue an executive subpoena for the information. The banks refused to cooperate. They contended that Mr. Spitzer had no power to compel production of their records. Relying on the OCC preemption regulation, they argued they were not subject to state investigation or enforcement actions related to their banking activities.
The OCC and the Clearing House Association, a banking trade group, filed an action in federal court to stop Mr. Spitzer from attempting to enforce New York’s fair-lending laws through demands for records or judicial proceedings. The district court ruled that Mr. Spitzer had no power to enforce New York fair-lending laws against national banks. The appellate court later agreed. The New York AG was not deterred and sought Supreme Court review. On June 29, 2009, in a 5-4 decision, the Supreme Court of the United States reversed the lower courts. It ruled the attorney general, now Andrew Cuomo, could bring enforcement actions against national banks, and does not have to defer to the federal government to enforce New York law.
At issue in the Cuomo case was whether the OCC’s regulation purporting to preempt state law enforcement was a reasonable interpretation of the National Bank Act (NBA). The NBA provides that only the OCC or its authorized representative may exercise “visitorial” powers over national banks. According to the OCC, visitorial powers include the examination of banks, the inspection of their books and records, the regulation and supervision of banking activities, and enforcing compliance with any federal or state laws concerning those activities. The Supreme Court held the OCC overstepped its authority with regard to the “enforcing compliance” limitation.
The Supreme Court explained that visitorial powers and enforcement powers are two different things. The NBA preempts only a state’s attempt to exercise visitorial powers. States are still free to enforce state laws that are not substantively preempted. For example, the federal Equal Employment Opportunity Act prohibits discrimination in the extension of credit. A state law that does the same thing is not preempted, because it is consistent with federal law. Prior to this case, only the OCC would have the power to bring an action for violation of a state’s nondiscrimination law. Now, a state attorney general can bring his or her own claim against a national bank.
The current draft of the house bill states attorneys general have full power to enforce state and federal law against national banks. State legislatures can pass any laws they like to protect consumers so long as those laws do not conflict with federal law and do not discriminate against national banks. A state law will not conflict if is is more protective of consumer rights than is federal law. Going further than the Supreme Court in Cuomo, this new law would allow states to exercise certain “visitorial” power over national banks. If this were the law when Mr. Spitzer asked for his information, the banks would have had to honor his requests.
Why is all this a big deal? For banks, one Consumer Financial Protection Agency is scary. But with the elimination of preemption, we will have now 50 mini CFPAs. What could be more popular today than bank bashing? If preemption is gutted, we will likely see a lot more state laws covering lending and a lot more state attorneys general with eyes on the governor’s mansion announcing new investigations of a national bank on the nightly news.