Supreme Court Rules for States Rights in Lending Case
June 29, 2009 - In 2003, federally chartered banks were sued more than 4,000 times by the states to enforce state lending laws. Then, in 2004, the Office of the Comptroller of the Currency issued a rule that essentially told the states that they could no longer file such suits. The rule stated that the OCC “does not grant state or other governmental authorities any right to inspect, superintend, direct, regulate or compel compliance by a national bank with respect to any law, regarding the content or conduct of activities authorized for national banks under Federal law." While the OCC agreed that state lending laws needed to be enforced, they stated that only the OCC had the authority to enforce those state laws; something which they failed to do. Today, the Supreme Court threw the OCC rule where it belongs; in the trash.
The trouble with the OCC’s 2004 rule became apparent almost as soon as it was issued. The states were forced to abandon their traditional regulatory role in financial matters related to federally chartered banks. As a result, those lenders continued to push the “creative thinking” envelope and continued to produce lending products that never should have seen the light of day. It is clear now that the OCC’s position created many of the financial problems that the country now faces.
In 2005 Elliot Spitzer, then Attorney General for the State of New York decided to test the OCC rule. Publicly reported data by several federally chartered banks appeared to indicate that the banks were charging much higher interest rates for residential mortgages in areas populated by minorities. If the pattern could be substantiated through evidence, it would show that the banks had violated both state and federal lending laws. So Spitzer subpoenaed data from the banks.
The banks fought the subpoenas and won based on lower court interpretations of federal banking laws. So New York filed suit in federal court; losing at every turn. That is, until today.
The 5 to 4 ruling by the Supreme Court is remarkable for a number of reasons. First, the justices that voted to support state’s rights are not a normal alliance on the Court. Normally, the swing vote on the court falls to Anthony Kennedy. This time, it actually fell to Antonin Scalia who sided with the unlikely bedfellows of Justices Ginsburg, Souter, Stevens and Breyer.
Secondly, it was actually Scalia who wrote the opinion for the majority saying, "If the Comptroller's exclusive exercise of visitorial powers excluded law enforcement by the States, it would also preclude law enforcement by federal agencies. Of course it does not."
The Financial Services Roundtable, a banking industry association, has said that it is worried that the decision will mean that banks now have to deal with a “patchwork” of state laws, making it difficult for them to operate. But until 2004, banks did operate in this type of a system and they made a profit without crashing the country’s economy.
The ruling is good news for consumers. It means that consumers can turn to appropriate state agencies if they believe that their state’s lending laws have been violated, and that the states can pursue a remedy in court.
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