Cuomo v. Clearing House Association: U.S. Supreme Court Begins to Pull Back the Reins on the Runaway OCC 

By Tami Alpert, Public Justice Power-Cotchett Fellow

Much like the gunfights of the old Wild West, there is a battle being waged to see who will win power to regulate and oversee the national banking industry.  In this showdown, on one side of the line is the federal Office of the Comptroller of the Currency (OCC), which is attempting to take over as sole overseer and regulator of national banks.  On the other side are the states, who wish to retain the power to enforce their own consumer protection laws with regard to national banks.

Over several years, the power-hungry OCC has charged ahead in its attempt to preempt the states’ power to regulate national banks.  But the OCC’s raid on state enforcement abilities was slowed a bit on June 29, 2009, when the U.S. Supreme Court took a much-needed first step towards reining in the agency. 

In Cuomo v. Clearing House Ass’n, L.L.C., --- U.S. ----,No. 08-453., 2009 WL 1835148 (June 29, 2009), the Court held 5-to-4 that some of the OCC’s regulations purporting to preempt the states’ ability to police national banks are not reasonable.  As explained in more detail below, while the Court ruled that the OCC has sole the power to exercise “visitorial powers,” which allow the visitor to inspect bank records at any time for any reason, it held that states do have the power to enforce their own banking regulation laws through civil court suits.  To fully understand the import of the Supreme Court’s decision, it is first necessary to step back and take a look at the underlying power struggle that gave rise to this particular gunfight between the states and the feds. 

Who’s Sheriff of This Town?  The Power Struggle Behind Cuomo.
In the wake of recent mortgage meltdowns, bank failures, and predatory lending, it’s no longer a secret that many federal administrative agencies have done little to patrol their pastures.  What is more, many agencies are actually controlled by the companies they purport to regulate.  In some cases, companies have managed to essentially immunize themselves from legal liability by convincing the feds to promulgate administrative regulations designed to expand the scope of federal preemption of state tort and consumer protection laws.

It is widely recognized that, in many areas, state laws provide individual consumers with far better and more generous remedies and rights than federal law.  Nonetheless, the Supremacy Clause of the U.S. Constitution provides that federal law trumps state law when the two clash.  Accordingly, one of the most common arguments that corporations make when they are caught violating state consumer protection laws or state tort laws is that those laws are preempted by federal law.  In case after case, corporations have vehemently argued that they are exempt from most or all state laws on the ground that the only standards they must meet are those contained in weak federal laws.

The OCC is a classic example of this unfortunate phenomenon.  There is a huge incentive for the OCC to please the banks it regulates, and the OCC’s pattern of behavior proves it has repeatedly acted on that incentive. 

Nonsensically, under our current system, banks are allowed to pick their own regulators.  The organizers of a bank can choose whether to operate under a state or national charter when the bank is formed, and they can switch charters from state to national or national to state at any time (unless they are in poor financial condition and a charter change will not be approved).  As such, banks have broad leeway to choose who will oversee and regulate their business.  They can decide to operate as a state chartered bank (regulated by state banking commissioners), federal thrifts or savings association (regulated by the Office of Thrift Supervision (OTS)), or national bank (regulated by the OCC).[1]  Banks largely choose to define themselves as federal entities because they possess considerable power to control the activities of the federal agencies that are supposedly calling the shots. 

This power stems from the fact that both the OCC and the OTS receive nearly all of their funding from user fees paid by the banks.  Under this perverse system, the federal agencies are pressured to please the banks (the regulated parties) in order to preserve their own budgets.[2] 

The extent of the problem can hardly be overstated.  In 2008, for example, over 70% of the OCC’s assessment revenue (which was 94% of the agency’s budget) came from a handful of large national banks.[3]  Because the OCC depends on national banks for its very existence, it bends over backwards to do their bidding.

Thus, for example, there have been occasions when OCC officials have openly urged banks to declare themselves “national banks” in order to avoid having to follow state law.  And, in the past several decades, the OCC has brought only a handful of consumer protection or anti-discrimination enforcement cases, and has a tiny staff to handle such cases.  In fact, “the OCC has not initiated a single public prosecution law” for years.[4]  State agencies, by contrast, have hundreds of employees and investigators to handle these cases, and have filed numerous successful enforcement actions against national banks.

But the biggest federal capitulation to national banks has come in the form of  OCC regulations that purport to  preempt -- or totally wipe out -- various state consumer protection laws that could be used to curb abuses by national banking entities.  One such regulation was at issue in Cuomo, where the U.S. Supreme Court considered the validity of an OCC rule that purported to strip the states of their power to enforce state consumer protection laws against national banks.  As we now explain, this time around, the Court refused to rubber-stamp the OCC’s attempted power grab.

The Gunfight at OK Corral: The Supreme Court Joins the Fray.
Cuomo v. Clearing House Ass’n, L.L.C., --- U.S. ----,No. 08-453, 2009 WL 1835148 (June 29, 2009),arose from a dispute regarding a state Attorney General’s power to enforce state fair lending laws.  In 2005, to determine whether several national banks, including Citigroup, JPMorgan Chase and Wells Fargo, had violated New York’s fair lending laws, the New York Attorney General sent letters requesting certain nonpublic information about their lending practices.  The letters inquired about the banks’ lending practices to minority customers, and pointed to “troubling” disparities that suggested that black and Hispanic borrowers had been charged disproportionately higher interest rates on mortgages compared with those for whites.  The letters asked for the information “in lieu of subpoena,” but implied that subpoenas might follow if the requests were not fulfilled.  The OCC and the Clearing House Association, a banking trade group, brought suit to enjoin the information requests, claiming that the OCC’s regulations promulgated under the National Bank Act (NBA) gave that kind of law enforcement authority to the OCC alone, and prohibited state law enforcement actions against national banks.  

The United States District Court for the Southern District of New York agreed with the OCC and entered an injunction prohibiting the Attorney General from enforcing state fair-lending laws through either demands for records or judicial proceedings.  Office of Comptroller of Currency v. Spitzer, 396 F. Supp. 2d 383, 407 (S.D.N.Y. 2005).  The Second Circuit affirmed.  Clearing House Ass’n, L.L.C. v. Cuomo, 510 F.3d 105 (2d Cir. 2007).  The New York Attorney General sought U.S. Supreme Court review to determine whether the OCC’s regulations purporting to preempt state law enforcement were reasonable interpretations of the NBA. 

The NBA provision at issue reads: “No national bank shall be subject to any visitorial powers except as authorized by Federal law, vested in the courts of justice or such as shall be, or have been exercised or directed by Congress or by either House thereof or by any committee of Congress or of either House duly authorized.”  12 U.S.C. § 484(a).
It was the OCC’s job to create regulations to implement this ban on the states’ imposition of “visitorial powers” on national banks.  But this proved easier said than done, because “visitorial powers” was never clearly defined by Congress.  When the NBA was originally enacted in 1864, scholars and courts understood “visitation” to refer to a sovereign’s supervisory power over the manner in which corporations conducted business. 

That power allowed a sovereign to use “prerogative writs” to exercise control if a corporation abused its lawful power, acted adversely to the public, or created a nuisance.  But it was never entirely clear what Congress meant when it used the term “visitorial powers” in the NBA, and nowadays there is added ambiguity because our state and federal governments no longer regularly employ the type of “prerogative writs” through which “visitorial powers” were traditionally enforced.

Generally, where there is uncertainty in statutory language, agencies are permitted to give authoritative meaning to that ambiguous language.  See Chevron U.S.A. Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837 (1984).  Applying this rule, the OCC, which is charged with administering the NBA, seized the opportunity to pass expansive regulations claiming broad powers for itself and drastically restricting the states’ power  to police the activities of national banks. 

The OCC’s rules read: “Only the OCC or an authorized representative of the OCC may exercise visitorial powers with respect to national banks, except as provided in paragraph (b) of this section. State officials may not exercise visitorial powers with respect to national banks, such as conducting examinations, inspecting or requiring the production of books or records of national banks, or prosecuting enforcement actions, except in limited circumstances authorized by federal law...” 12 C.F.R. § 7.4000 (2009) (emphasis added).  The OCC went on to broadly define “visitorial powers” as including: “(i) Examination of a bank; (ii) Inspection of a bank’s books and records; (iii) Regulation and supervision of activities authorized or permitted pursuant to federal banking law; and (iv) Enforcing compliance with any applicable federal or state laws concerning those activities.” Id. (emphasis added).

Although these OCC regulations may appear innocent at first blush, they actually represent a remarkable power-grab by the OCC -- one which clearly was designed to deprive the states of any ability to investigate bank conduct or carry out enforcement actions against national banks who violate state laws.  

In Cuomo, the New York State Attorney General challenged these sweeping regulations as exceeding the boundaries of the OCC’s authority and impermissibly treading on the states’ power to protect their citizens against the abuses and excesses of national banks.  A number of consumer advocacy groups joined in an amici brief on behalf of New York State, noting the crucial role states play in enforcing consumer protection laws.  Brief for the Center for Responsible Lending, et al. as Amici Curiae Supporting Petitioner, Cuomo v. Clearing House Ass’n, L.L.C., --- U.S. ----,No. 08-453., 2009 WL 1835148 (June 29, 2009), 2009 WL 556380. 

By a vote of 5-to-4, the Supreme Court dealt the OCC a partial -- but important -- defeat.  Writing for the majority, Justice Antonin Scalia concluded that the OCC had gone too far in defining “visitorial powers” to include the states’ power to enforce their own laws against national banks.  “Visitorial powers,” wrote Justice Scalia, are “quite separate” from the power to enforce the law and state attorneys general cannot legally be stripped of their power to acting as “sovereign-as-law-enforcer[s]” in seeking the information from banks.  Cuomo, 2009 WL 1835148 at *10.The Court held 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.  And contrary to what the [OCC] regulation says, the National Bank Act pre-empts only the former.” Id.at *6 (emphasis added).

In so ruling, the Court dealt an important blow on behalf of consumers by allowing states to retain their enforcement powers with respect to national banks.  This determination, however, did not translate into a victory for the New York Attorney General with respect to the particular activities at issue in Cuomo.  Having swatted back the OCC’s attempt to strip the states of all enforcement powers vis-à-vis national banks, the Court went on to hold that the particular letters sent by the New York Attorney General to the national banks were not an exercise of prosecutorial enforcement powers, and were therefore not permissible.  On this point, the Court reasoned that the New York Attorney General had not threatened to bring a civil suit on behalf of the state against the bank, but instead had backed a request for documents with merely an implied threat to issue a subpoena on his own authority under New York’s Executive Law.  The Court determined that this type of action does not constitute “law enforcement” and therefore is preempted by the NBA and the OCC’s implementing regulations.  Id. at *10.

The Importance of Cuomo
Although Cuomo did not yield a full victory for states and consumers, the Court’s decision is an important first step in reining in the runaway OCC.  And, although the Court determined that states do not have “visitorial powers” over national banks, its formal recognition that the OCC lacks to authority to strip states of their regulatory powers over national banks is a significant victory for consumers.

Cuomo is also important for what it says about the ability of administrative agencies to expand the scope of federal preemption.  Again and again, federal agencies have been trying to wipe away state laws by including broad preemption language in their administrative regulations.  By refusing to defer to the OCC’s regulations, Cuomo signals that there are limits to federal government’s ability to achieve federal preemption by regulatory fiat.  Although it’s not yet time for consumer advocates to ride off into the sunset, Cuomo took an important step towards protecting consumers by reaffirming the states’ powers to protect their citizens from corporate abuse.  With this mixed victory, it seems the final showdown must wait for another day. 

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[1]See, e.g., Christine E. Blair & Rose M. Kushmeider, Challenges to the Dual Banking System, 18 FDIC Banking Rev. 1, 14 (2006), http://www.fdic.gov/bank/analytical/banking/2006mar/article1/article1.pdf.

[2] Jess Bravin, Next Case: State v. Federal Power, Wall S. J., Apr. 27, 2009, at A3 (“Banks get to choose their regulator -- state or federal.  Because regulatory fees fund the agencies, state banking departments are, in effect, competitors with the comptroller’s office for the banks’ business. . . .  The comptroller’s office promotes its power to preempt state laws the banks consider burdensome.”), http://online.wsj.com/article/SB124078827601457447.html.

[3] OCC Annual Report for Fiscal Year 2008 at 51-52, http://www.occ.treas.gov/annrpt/1-2008AnnualReport.pdf.

[4] Arthur E. Wilmarth, Jr., The OCC’s Preemption Rules Exceed the Agency’s Authority and Present a Serious Threat to the Dual Banking System Consumer Protection, 23 Ann. Rev. of Banking & Fin. L. 225, 232 (2004).

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