The Supreme Court, the Economy, and Bank Regulation

To those interested in the law, one of the most interesting threads of the economic crisis of the last few years has been the incessant finger-pointing back and forth among different regulators attempting to avoid blame for the collective failure to monitor the activities of mortgage originators leading up to the housing bubble.  Federal regulators claim that most of the bad actors were regulated by the States.  State regulators, on the other hand, claim that their hands were tied by the generous shelter federal regulators provide to the entities that they regulate.

The dispute is crystallized in a pair of Supreme Court decisions from the last two summers.  To the non-lawyer, their subject matter (the extent to which the federal National Bank Act preempts state law) might seem technical.  But in truth they shed a great deal of light on the role judges have played in this area—light that does not reflect well on the Supreme Court’s contribution to the crisis and its resolution.  The first case, Watters v. Wachovia Bank, N.A.[1], involved Michigan’s efforts to regulate nonbank mortgage originators extending credit to her residents.  When Wachovia acquired the originator in question, it took the position that its own status as a national bank sheltered the newly acquired subsidiary from Michigan’s regime of licensing and regulation.  Federal regulators at the OCC—typically skeptical of the value to be added by state regulation—took the position that federal law sheltered not only Wachovia itself, but also the newly acquired subsidiary.  Although nothing in the National Bank Act speaks directly to the question, the Supreme Court sided with the OCC.  Essentially, the decision established a roadmap for any mortgage originator seeking to avoid burdensome state regulation—seek an acquisition by a national bank or its holding company.

This spring, when the economic crisis had turned even darker than it was when the Court decided Watters, the Justices heard arguments in Cuomo v. Clearing House [2].  That case involved the ability of New York regulators to enforce lending laws that prohibit discrimination on the basis of race and other similar characteristics.  New York regulators took the position that they were entitled to use ordinary procedures to enforce those laws, even against national banks—seeking the discovery of relevant documents by subpoena, to be followed by litigation if it seemed appropriate to New York’s attorney general.  The major New York banks (backed again by the OCC) admitted that New York’s rules against lending discrimination were valid, but they argued that only the OCC had the power to enforce them.  The Court split 5-4, with Justice Scalia writing for a majority that held that the state can enforce its fair lending laws against the national banks in its jurisdiction.

The cynic might say that the Court simply backed down, unwilling to continue to fetter banking regulators as the recession deepens.  But even a cursory reading of the opinion suggests much deeper legal and practical questions, which make it quite difficult to assess what the case means for banks and regulators in the years to come.  Responding to that concern, we have put together a special issue collecting an assortment of views on the case.   Professor Arthur Wilmarth Jr. is a noted banking law scholar on the law faculty at George Washington University who filed an amicus brief in this case on behalf of state financial regulators.  In “Cuomo v. Clearing House: A Crucial Victory for the Dual Banking System and Consumer Protection,” he lays out the background of the case in detail and offers an optimistic perspective on the benefits that will flow from the decision.  Conversely, Bob Long and Keith Noreika are attorneys at Covington, Burling who have been deeply involved in both Watters and Cuomo.  In “Cuomo v. Clearing House Association: A Misguided Decision That Could Have Been Worse,” they emphasize some of the problems with Justice Scalia’s reasoning and underscore some key reasons to think the decision’s future impact might be limited.  Finally, Tom Merrill is a distinguished academic and advocate, one of my colleagues at Columbia Law School and formerly a Deputy Solicitor General in the Department of Justice.  He filed amicus briefs in both Watters and Cuomo, arguing in both cases that fundamental principles of administrative law required the Court to rein in the OCC’s efforts to preempt state regulation.  In “Cuomo v. Clearing House Association: Why We Are Still in the Dark About Agency Preemption,” he points out the basic legal problem that the Court has faced and left unanswered in both of these cases: how to deal with the decisions federal agencies make about what federal laws mean when those decisions affect the preemption of state laws.  As he explains, the Court’s failure to think coherently about that basic question leaves us little more certain than we were before about how far federal regulators can go to shelter national financial institutions from state law.

1) Watters v. Wachovia Bank, N.A. 127 S. Ct. 1559 (2007)

2) Cuomo v. Clearing House Assn., L.L.C., 557 U.S. ___ (2009).