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Dreher Tomkies LLP
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Columbus, Ohio 43215
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The United States Supreme Court affirmed in part and reversed in part the Second Circuit decision enjoining the New York Attorney General’s office from enforcing the state’s fair lending law against national banks and their operating subsidiaries. Cuomo v. Clearing House Association, LLC, Case No. 08-453 (June 29, 2009).

The Office of the Comptroller of the Currency (OCC) had sought declaratory and injunctive relief to stop the New York Attorney General from investigating national banks and their operating subsidiaries in an attempt to enforce New York’s fair lending laws that are designed to prevent racial discrimination. The OCC argued that the state was infringing on the OCC’s exclusive visitorial authority by its actions in violation of Section 484(a), regarding visitorial powers, as set forth in OCC regulation 12 C.F.R. § 7.4000. The OCC did not challenge the applicability of state antidiscrimination laws to national banks, but rather focused on the Attorney General’s attempt to enforce the law against national banks, including requests for books and records.

The Supreme Court acknowledged that there is necessarily some ambiguity as to the meaning of the statutory term “visitorial powers” but stated that the presence of some uncertainty does not expand Chevron deference to cover virtually any interpretation of the National Bank Act (NBA).

Defining Visitorial Powers

The Court concluded that a sovereign’s “visitorial powers” and its powers to enforce the law are two different things and, contrary to what the Comptroller’s regulation says, the NBA pre-empts only the former. The Court explained that while no one denies that the NBA leaves in place some state substantive laws affecting banks, the Comptroller’s rule says that the state may not enforce its valid, nonpre- empted laws against national banks. The Court found that on a pragmatic level, the difference between visitation and law enforcement is clear. The Court stated that if a state chooses to pursue enforcement of its laws in court, then the state is not exercising its power of visitation and will be treated like a litigant. The Court explained that an attorney general acting as a civil litigant must file a lawsuit, survive a motion to dismiss, endure the rules of procedure and discovery, and risk sanctions if his claim is frivolous or his discovery tactics abusive. The Court explained that a visitor, by contrast, may inspect books and records at any time for any or no reason. The Court concluded that the Comptroller’s regulation does not make this distinction and, therefore, does not comport with the statute.

The Court held that “visitorial powers” in the NBA refers to a sovereign’s supervisory powers over corporations. These powers include any form of administrative oversight that allows a sovereign to inspect books and records on demand, even if the process is mediated by a court through prerogative writs or similar means. The Court found that the Comptroller reasonably interpreted this statutory term in Section 7.4000 to include “conducting examinations [and] inspect or requiring the production of books or records of national banks” when the state conducts those activities in its capacity as supervisor of corporations. The Court explained that, however, when a state attorney general brings suit to enforce state law against a national bank, he is not acting in the role of sovereign-as-supervisor, but that in the role of sovereign-as-law-enforcer. The Court held that such a lawsuit is not an exercise of “visitorial powers” and, thus, the Comptroller erred in Section 7.4000 by extending the definition of “visitorial powers” to include “prosecuting enforcement actions” in state courts.

Executive Subpoena Rejected

The Court found that with respect to the request for information in the case before Court, the Attorney General issued subpoenas on his own authority under New York Executive Law, which permits such subpoenas in connection with his investigation of “repeated fraudulent or illegal acts . . . in the carrying on, conducting or transactions of business.” N.Y. Exec. Law Ann. § 63(12). The Court found that such action is not the exercise of the power of law enforcement “vested in the courts of justice” that 12 U.S.C. § 484(a) excludes from the ban on the exercise of supervisory power. Accordingly, the Court affirmed the injunction below as applied to the issuance of executive subpoenas by the Attorney General but vacated the injunction insofar as it prohibited the Attorney General from bringing judicial enforcement actions.

The majority rejected the dissent’s position that given the ambiguity of the term “visitorial powers,” the Chevron deference test should be applied to reach the conclusion that the OCC’s interpretation was reasonable.

Changing Risks

The decision is likely to result in some increased risk of legal action by state attorney generals against national banks and their operating subsidiaries but is unlikely to unleash a torrent of such actions immediately. The high cost of litigation and procedural hurdles are likely to give state attorneys general pause. Moreover, the boundaries of preempted and non-preempted state law remain unclear in many important respects, adding to the uncertainty and potential cost of pursuing enforcement actions. These impediments and the time required to prosecute litigation suggest that closer consultation and cooperation between state and federal regulators are likely to be more productive pursuits in the short term.

Nonetheless, financial institutions and their operating subsidiaries will need to give greater attention to state compliance issues in the future. While the pursuit of litigation may involve greater cost and effort than simply issuing executive subpoenas, state attorneys general have demonstrated a greater willingness to cooperate and coordinate efforts, with select attorneys general taking the lead on particular issues, establishing precedents and allowing other attorneys general to sign on.

Further, the impetus for targeted financial institutions to settle suits and establish precedents that affect non-party industry participants likely will remain high. A liberal interpretation of state statutes in favor of consumers may be upheld. Consequently, financial institutions and their agents may increasingly find themselves held to standards of conduct not specifically mandated by statutory language or bank regulatory interpretations.

Finally, the proposed Consumer Financial Protection Agency, the White House’s memorandum on preemption issued May 20, 2009 and other proposals impacting the Federal Trade Commission Act and the scope of federal preemption are likely to have a significant role in shaping preemption in the future, especially to the extent that federal standards become a mere floor for compliance that may be exceeded by state law.

Please contact us if you would like a copy of the Supreme Court’s decision or the proposed Consumer Financial Protection Agency bill and accompanying Federal Trade Commission Act amendment.

  • Elizabeth Anstaett and Mike Tomkies