The Empire (State) Strikes Back: New York AG Breaks OCC’s Federal Preemption Winning Streak in Cuomo v. Clearing House Association

June 30, 2009 at 4:57 pm Leave a comment

After years of consistently siding with Office of the Comptroller of the Currency (OCC) on preemption issues, the United States Supreme Court has tossed a bone to state regulators.  In a June 29, 2009 decision, Cuomo vs. Clearing House Association, the Court held that an OCC regulation purporting to preempt certain state law enforcement activities is not a reasonable interpretation of the National Bank Act (NBA).  Given the preemptive force of the NBA, a clear assessment of how the decision will change the balance of power between federal and state regulators is impossible to make right now.   But any decision breaking the OCC’s high-court winning streak must be considered a major victory for state regulators (as well as self-styled consumer “advocates”). 

The facts of the case begin in 2005, when then-Attorney General (AG) Eliot Spitzer sent letters “in lieu of subpoena” to several national banks operating in New York.  The letters requested non-public information about the banks’ lending practices.  According to the AG, the state sought this information to determine whether the banks were violating state fair lending laws.  The Clearing House Association, a banking trade group, filed suit in the Southern District of New York to enjoin the AG from seeking the information, contending that the NBA and the OCC’s regulations implementing the NBA preempt this type of state law enforcement against national banks.

Specifically, the Clearing House Association relied on (1) NBA § 484, which provides that no national bank is subject to a state’s “visitorial powers” except as expressly authorized by federal law and (2) 12 CFR § 7.4000, the OCC regulation implementing the NBA, which forbids states to “exercise visitorial powers with respect to national banks, such as conducting examinations, inspecting or requiring the production of books or records” or “prosecuting enforcement actions.”    

The District Court granted the injunction, prohibiting the attorney general from enforcing state fair lending laws through demands for records or judicial proceedings. The Second Circuit Court of Appeals affirmed, and the United States Supreme Court granted cert to address whether the Comptroller’s regulation purporting to preempt state law enforcement constituted a reasonable interpretation of the National Bank Act, which allows the OCC to promulgate regulations prohibiting state actors from exercising visitorial powers over a national bank.  More specifically, the Court confronted the question of whether the NBA allows the OCC to preempt a state attorney general’s request for the records of national bank, either by letter or subpoena, on the grounds that such a request constitutes an impermissible exercise of visitorial powers.  After reciting the familiar Chevron deference framework, the opinion, drafted by Justice Scalia and joined by Justices Stevens, Souter, Ginsburg and Breyer, concludes that the OCC’s regulation is not a reasonable interpretation of the NBA. 

The opinion centers on the hazy distinction between a state’s “visitorial powers,” which are preempted by the NBA, and a state’s basic law enforcement powers, which the court held are not.   According to Justice Scalia, the OCC’s definition of visitorial powers, in 12 C.F.R. § 7.4000 simply reaches too far to constitute a reasonable interpretation of the NBA.  While agreeing that the NBA allows the OCC to issue regulations preempting traditional “visitorial powers” that would allow the state to exercise general oversight and control over the everyday affairs of national bank—e.g., the power to inspect books and records at any time for “any or no reason,” the Court disagreed that the NBA’s preclusion of a state’s ability to exercise visitorial powers over a national bank means that a state cannot enforce laws against national banks operating in the state.  Instead, the NBA preserves general state law enforcement powers, including law enforcement actions brought in the “courts of justice” within the states.   

As a result the NBA’s reservation of state law enforcement powers, s reservation of power, the state attorneys general (and presumably other state regulators) may bring court actions against national banks to ensure that the national banks are complying with state law.  The Court characterized the distinction between visitorial powers and law enforcement powers as follows:  “If a State chooses to pursue enforcement of its laws in court, then it is not exercising its power of visitation and will be treated like a litigant.”  Acknowledging the potential for abuse of the judicial process, the Court noted that “[i]n New York, civil discovery is far more limited than the full range of ‘visitorial powers’ that my be exercised by a sovereign.” 

The banking community did not provide a warm reception for the opinion.  Edward L. Yingling, president of the American Bankers Association issued a statement declaring that OCC-chartered banks “will face a patchwork of duplicative and conflicting federal and state regulation and enforcement actions . . .  This will make it difficult to serve consumers in today’s hi-tech, mobile society where people and bank services move constantly across state lines.”

            Yingling might be jumping the gun.  Although this case is a stark departure from its recent national bank preemption jurisprudence, it still requires antsy attorneys general to invoke the judicial process.  As a result, fears of massive invasive action by the states maybe premature.  It will, however, be interesting to see whether state legislatures respond to the ruling by passing additional laws to target national banks, especially in the area of consumer protection law.

Entry filed under: Uncategorized.

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