More (State) Regulations for Banks? High Court to Weigh In

[WSJ Law Blog]

All those interested in Federalism and the interplay between state and federal regulation might tune in to Tuesday’s Supreme Court arguments in a case called Cuomo v. Clearing House.

The specific issue in the case: whether New York’s antidiscrimination laws should apply to national banks. If the state wins, it would mark a break with decades of precedent that mostly favors the powers of the federal government and open a new era for 50 state regulators to play a bigger role. Click here for the story, from the WSJ’s Jess Bravin.

The background: Under both Democratic and Republican administrations, the Treasury regulator, the Office of the Comptroller of the Currency, has allied with the banks it supervises to set aside state laws ranging from disclosure requirements on loans to limits on surcharges at automated teller machines. The comptroller’s office argues that the National Bank Act, first adopted in 1863, envisions a system where national banks operate efficiently across state lines without regard to a patchwork of local regulations and authorities.

The Supreme Court almost always has agreed. But things might be changing. The financial crisis many blame on a mortgage industry rife with abuse could undercut the argument that the National Bank Act was intended to shield national banks from state law-enforcement measures. Additionally, in Tuesday’s case, the comptroller’s office seeks to extend its power further than ever. The agency and the banks it oversees assert that even when state laws do apply to national banks, the comptroller alone — and not state authorities — holds power to enforce them.

All 49 other states, plus the District of Columbia, joined a friend-of-the-court brief backing New York and its current attorney general, Andrew Cuomo.

“The states are broadly concerned about the erosion of state authority,” says Bob Cooper, a spokesman for the Idaho attorney general.

Testifying before Congress in 2007, the federal agency’s head, Comptroller of the Currency John Dugan, saw it differently. “We believe it’s counterproductive for states to focus their finite enforcement resources on national banks that are already heavily regulated — especially when there are lightly regulated state entities, like many subprime lenders and mortgage brokers, that clearly have been the source of real problems,” Mr. Dugan said.