The Wonk Room

Supreme Court: States Have The Right To Investigate National Banks For Lending Discrimination

Though the Supreme Court case garnering the most headlines today will be the Ricci v. DeStefano employment discrimination case, a second decision came down with important implications for the future of financial regulation. In a 5-4 decision in Cuomo v. The Clearing House Association, the Court decided that states are allowed to investigate national banks for discrimination and violating state fair-lending laws, which reverses (in part) a 2nd U.S. Circuit Court of Appeals ruling from 2007.

The Clearing House argument was that only the federal government (in this case, the Office of the Comptroller of the Currency) has the ability to investigate national banks. Justice Antonin Scalia joined the four liberal justices in disagreeing with this argument:

The foregoing cases all involve enforcement of state law. But if the Comptroller’s exclusive exercise of visitorial powers precluded law enforcement by the States, it would also preclude law enforcement by federal agencies. Of course it does not…In sum, 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.

This case began when Eliot Spitzer, then New York’s attorney general, wanted to discover “whether minorities were being charged higher interest rates on home mortgage loans.” But at the time, the courts ruled that Spitzer was barred from investigating whether national banks were engaging in such practices, leaving the job to ineffectual federal regulators. Current New York AG Andrew Cuomo called the Supreme Court’s reversal of this decision “a huge win for consumers across the nation.”

As Adam Levitan added at Credit Slips, “hopefully this opinion, combined with the emphasis in the Obama financial restructuring plan on ending federal preemption of state consumer protection laws (federal law will be a floor, not a ceiling), marks a turning point in the long march of federal preemption of state consumer protection laws in financial services.” Indeed, Obama has taken positive steps to ensure that states can enforce consumer protections within their own borders, despite pressure from the mortgage and insurance industries.

In the grander scheme of things, this was an attempt by the banking and mortgage industries to grab a piece of the immunity from state law already enjoyed by the health insurance and medical device industries (as outlined by Ian Milhiser here). Hopefully this case will blunt the charge by others, including the restaurant industry, to avoid state law.