Supreme Court hears arguments over states’ right to investigate national banks

Court hears case of state investigations of banks

WASHINGTON — New York officials on Tuesday asked the Supreme Court to let states enforce their anti-discrimination laws against national banks, despite arguments from the federal government that it is the only entity that can regulate those financial institutions.

Several justices questioned whether it made sense to allow states to make laws that could be used to investigate illegal actions at banks that operate within their borders, but then only let the federal government enforce them against national banks.

“That seems passing strange,” Justice Ruth Bader Ginsburg said.

The state of New York, with the backing of the other 49 states, wants the Supreme Court to overturn a federal appeals court decision that blocks states from investigating the lending practices of national banks.

Eliot Spitzer, then New York’s attorney general, wanted to investigate whether minorities were being charged higher interest rates on home mortgage loans, a practice that is prohibited under various state and federal laws. But a federal judge said Spitzer could not enforce state fair-lending laws against national banks or their operating subsidiaries by issuing subpoenas and bringing enforcement actions against them.

The 2nd U.S. Circuit Court of Appeals in New York City upheld that decision, saying responsibility for such investigations rests with the Office of the Comptroller of the Currency, a part of the Treasury Department, and other federal agencies.

Both the Clearing House Association, which represents the banks, and the comptroller said the attorney general was interfering with the federal government’s supervisory powers.

Spitzer wanted the banks’ books in order to investigate the bank’s criteria for lending money. “He’s right on the OCC’s turf,” said Malcolm Stewart, Justice Department deputy solicitor general.

New York Solicitor General Barbara Underwood told the justices that they don’t believe Congress intended for the comptroller to be the only government office to enforce the laws against national banks.

“State anti-discrimination and consumer protection laws can be enforced against national banks by the federal OCC and by private parties, but not by state attorneys general,” Underwood said. This unusual enforcement pre-emption “detaches the state’s power to make laws from its power to enforce them.”

New York argued that the federal government doesn’t have the manpower or the expertise on the ground to be able to do oversight correctly. Justice John Paul Stevens noted that at one point the federal comptroller’s office only had 10 people available to work on enforcement.

But allowing states to enforce their laws against national banks with branches within their borders would mean that 51 different agencies — the 50 states plus the federal government — could come to different conclusions about the same action a bank takes nationwide, said Justice Stephen Breyer. “How is a bank to function?” Breyer said.

“Why can’t Congress or the OCC think that that’s where the difficulties are going to arise?” Chief Justice John Roberts added. “In other words, it’s kind of a less intrusive approach, and saying, ‘Well, you can have your state law but we are concerned about enforcement, so we are going to be the ones that enforce it.’”

The states supporting the New York appeal said in court papers the lower courts’ decision “interferes with the states’ ability to enforce their own laws and protect their own citizens.”

“Moreover, the current economic crisis, caused in large part by reckless subprime mortgage lending, has demonstrated the need for consumer protection and regulatory oversight in the area of mortgage lending,” the states argued.

Spitzer was New York’s attorney general until he became governor in 2007. He resigned in a sex scandal. Andrew Cuomo is the current state attorney general.

The justice are expected to make a decision in early summer.

The case is Cuomo v. The Clearing House Association, 08-453.