WASHINGTON — The nation's financial crisis rears its head in the U.S. Supreme Court this month in a major turf war between all 50 state attorneys general and the chief federal regulator of national banks.

Various states and the Office of the Comptroller of the Currency (OCC) have fought in courts in recent years over state authority to enforce certain state civil rights and consumer protection laws against national banks in the nation's dual banking system. But the states often encounter a near-impenetrable wall of federal pre-emption.

The justices soon will hear arguments in a case brought by New York Attorney General Andrew Cuomo who, backed by his 49 colleagues, major civil rights and consumer organizations, and public and private state regulatory groups, contends that the OCC has now gone too far.

They challenge an OCC regulation, and a lower court ruling, stating that the OCC has exclusive authority to enforce state fair lending laws against national banks. They have dubbed the OCC approach "enforcement preemption" because state laws are not substantively pre-empted, only a state's power to enforce them. Cuomo v. The Clearing House and OCC, No. 08-453.

"This attempt to preclude States from enforcing their non-preempted laws against federally chartered banks is a serious assault on our federal system," the states charge in an amicus brief supporting Cuomo.

The challenge is a good test case, according to scholars and practitioners, because of the timing — the current economic crisis — and the underlying facts — New York's attempt to investigate allegations of unfair and discriminatory subprime mortgage lending by banks operating in the state.

In addition to "all the niceties of legal arguments very well made," said Keith R. Fisher of Franklin Pierce Law Center, amicus counsel to the North American Securities Administration Association, supporting Cuomo, "there comes a point at which a good judge looks at the practicalities and consequences of ruling in a particular way.

"If I were on the court, I would be very, very skeptical of taking 50 different sources of supervision, regulation and law enforcement completely out of the equation in an area that has shown itself to be a breeding ground for greed, corruption and financial excess, and consequently, disaster."

But from a practical standpoint, "These beasts [national banks] are organized and chartered by the federal government," said Maureen Young, a partner in Bingham McCutchen's financial institutions corporate and regulatory group who is not involved in the Cuomo case. "They are not state corporations.

"There is a lot of evidence to say that the federal government thought about this and the statutes reflect the intent of Congress that national banks are going to be regulated and supervised by the primary federal regulatory agencies. I tend to think that's how the case will come out."

Defining power

The Supreme Court case actually started with then-New York Attorney General Eliot Spitzer, who found in publicly reported data significantly higher interest residential mortgage rates charged to minorities compared with white borrowers. He sought nonpublic data and information regarding the mortgage lending practices of several national banks and their subsidiaries in April 2005.

The public data, according to his office, suggested a prima facie case of race discrimination in violation of state and federal fair lending laws.

The OCC, asserting exclusive "visitorial" authority over national banks, moved to enjoin the attorney general's inquiry letters and was then joined by The Clearing House Association, a consortium of national banks, some of which had received the letters.

A district court and the 2d U.S. Circuit Court of Appeals, in a 2-1 decision, ruled against the state after finding that the OCC's interpretation of its authority was reasonable and was owed the highest deference under Chevron U.S.A. v. NRDC, 467 U.S. 837 (1984).

The 2d Circuit relied heavily on the Supreme Court's decision in Watters v. Wachovia Bank, 550 U.S. 1 (2007), in which Michigan challenged the OCC's exclusive authority and supervision over national banks' lending activities conducted through operating subsidiaries.

In that case, the Supreme Court, ruling 5-3 (Justice Clarence Thomas did not participate), held that Wachovia's mortgage business, whether conducted by the bank itself or through operating subsidiaries, is subject to the OCC's superintendence and not to the licensing, reporting and visitorial regimens of the states in which the subsidiary operates.

The majority lineup was justices Ruth Bader Ginsburg, Anthony M. Kennedy, David H. Souter, Stephen G. Breyer and Samuel A. Alito Jr.

Radical proposition

In the Supreme Court, battle lines are drawn again over the OCC's interpretation of its visitorial powers under the National Bank Act and a 2004 regulation promulgated by the office.

The National Bank Act's Section 484 provides, in pertinent part, that "[n]o 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."

Through a series of rulemakings beginning in 1999, the OCC interpreted its "visitorial powers" in increasingly broader ways. The OCC now defines the term to include the examination of a bank; inspection of a bank's books and records; regulation and supervision of activities authorized or permitted pursuant to federal banking law; and enforcing compliance with any applicable federal or state laws concerning those activities.

A 2004 regulation interpreted the exception to OCC's visitorial powers — "vested in the courts of justice." That exception, it said, "does not grant state or other governmental authorities any right to inspect, superintend, direct, regulate or compel compliance by a national bank with respect to any law, regarding the content or conduct of activities authorized for national banks under Federal law."

Representing Cuomo in the high court, New York Solicitor General Barbara Underwood argues that, since the establishment of the national banking system more than a century ago, the general rule has been that both federal and state laws apply to national banks.

"This Court has consistently recognized the right of state officials to sue national banks to enforce generally applicable state laws when those laws are not substantively preempted," she contends.

In the 1997 Riegle-Neal Amendments, she said, "Congress expressly preserved the application of host state laws pertaining to consumer protection, fair lending, community reinvestment, and establishment of intrastate branches." In 1966 and 1994, Congress, she added, gave the OCC the power to enforce state law administratively, but did not withdraw states' enforcement authority and did not give the OCC the full scope of remedies available to the states.

Banking law scholar Arthur Wilmarth of the George Washington University Law School, who has authored an amicus brief supporting Cuomo, calls the OCC position that states cannot enforce nonpre-empted laws "a radical proposition.

"This is fundamental: If states don't have sovereign authority to enforce their own laws, what's left of sovereignty?" he asked. "If the 10th Amendment does protect a zone of state sovereignty, it would be hard to imagine anything more central to that zone than the power to enforce its own law."

Wilmarth, Franklin Pierce's Fisher and others said that courts and the OCC, from the 1870s to even as late as 1999, recognized that states could go to court to enforce their laws against national banks when those laws did not conflict with federal law.

From 1999 to 2003, added Wilmarth, a number of states had adopted various laws specifically designed to respond to subprime predator lending. "They could see it made no sense at all. But the OCC came in in 2003, looked at the Georgia statute and said it would pre-empt this and every similar statute. Now look what has happened."

Consumer finance scholar Christopher Peterson of the University of Utah S.J. Quinney College of Law, who is not involved in the case, said the OCC has "strong incentive" to charter more banks because those banks pay dues on their total amount of capital. "It's true the OCC will make more money for itself and have more power if it actively protects banks from the consumer protection impulses of state attorneys general," he said.

Better interpretation?

The OCC, represented by the solicitor general of the United States, and The Clearing House, represented by former Solicitor General Seth P. Waxman, a partner in the Washington office of Wilmer Cutler Pickering Hale and Dorr, see it differently.

Supported by the American Bankers Association, the U.S. Chamber of Commerce and others, they contend that the OCC's interpretation of the term "visitorial powers" better reflects the National Bank Act's "text, structure, and purposes than [Cuomo's] alternative view that the term is limited to supervisory oversight of a bank's internal management, safety and soundness, and charter compliance."

The Supreme Court's Watters decision, they add, is in agreement with the OCC's view.

"Indeed, in Watters, this Court concluded that Michigan laws authorizing virtually the same enforcement actions that petitioner sought to take here involved the exercise of 'visitorial powers,' " the government told the justices. "OCC's interpretation is further supported by other provisions of federal banking law that explicitly address the appropriate entity for enforcing state fair lending laws against national banks."

"In this case, the clear express wording of statute itself, without relying on OCC's pre-emption regulation, gives the court all of the ammunition it needs to find that pre-emption is supported," agreed banking attorney Kevin Funnell of Frisco, Texas, author of the Bank Lawyer's Blog.

Funnell said financial institutions have fought many pre-emption battles since the 1970s, and the trend has been to expand federal authority.

A tepid enforcement record

"I understand the frustration of the states," he said. "OCC and [the Office of Thrift Supervision] have not been fierce enforcers. Those of us in the game know the states are much more vigilant in enforcing their laws."

A number of amici briefs supporting Cuomo catalog for the justices OCC's tepid enforcement record.

"In contrast to States, which brought more than 4,000 enforcement actions in 2003, the year before [the OCC's challenged regulation] took effect, the OCC has concluded only four enforcement actions to protect consumers from abusive practices in the past five years," says the National Association of Realtors.

Will or should OCC's enforcement record or the current economic crisis figure into the justices' deliberations in this case?

One banking lawyer, who asked for anonymity, said, "No, I think it should be decided on the applicable rule and statute. But whatever the court decides, I expect a congressional reaction."

"How could it possibly not play a role?" asked Utah's Peterson. "There are civil libertarians on the court but not so much someone who fits into the populist muckraker shoes that we've had in the past. Maybe this is an opportunity for some of them to rediscover some of their long lost populism."

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