BANKING
Can States Enforce Their
Civil Rights Laws
Against National Banks?
by Ann Graham
PREVIEW of United States Supreme Court Cases, pages 435-439. © 2009 American Bar Association.
employ a two-step analysis to determine the validity of a federal
Ann Graham is a professor of law
agency's interpretation of a federal
at Texas Tech University School of
statute. First, the courts look to the
Law. In addition to private law
statute to determine whether
practice representing financial
Congress has directly spoken to the
institutions, she has served in
,. precise question. If the intent of
FDIC's Washington Office, as
Congress is clear, the courts must
FDIC's Dallas Regional Counsel,
follow it. In the second step, if the
as General Counsel for the Texas
statute is silent or ambiguous, the
Department of Banking and as
courts must defer to the federal
Chief Regulatory Counsel for
agency's interpretation if it is perthe Texas Bankers Association.
missible-not the best interpretaShe can be reached at
tion or even one that the court
ann.graham@ttu.edu, blogging at
would prefer. This doctrine comes
http://lawprofessors. typepad.coml
from the 1984 Supreme Court opinbankingl, or (806) 742-3990,
ion in Chevron USA Inc. v. Natural
ext. 295.
Resources Defense Council, 467
U.S. 837.
ISSUES
Should the OCC's regulation, 12
C.F.R. § 7.4000, be upheld because
of "Chevron deference" or should
the Court determine that "Chevron
deference" is not warranted because
the OCC's interpretation deprives
the states of authority to enforce
state laws against a national bank
even when the laws themselves have
not been preempted?
The Office of Comptroller of the
Currency (OCC), the federal agency
that regulates national banks, contends that the New York attorney
general cannot interfere with the
OCC's exclusive "visitorial power"
over national banks and that the
states may not take advantage of an
exception in federal statute that
makes national banks subject to
powers "vested in the courts of justice." The attorney general counters
that the OCC regulation at issue in
this case is invalid because it is
inconsistent with the National Bank
Act and prior case law and, further,
that it is not entitled to deference
from the courts.
In this case, the attorney
general of the state of
New York is challenging a
regulation adopted by the
Office of the Comptroller
of the Currency (OCC),
which was invoked to
prohibit a state from
investigating or filing suit
against a national bank
when the state is
seeking to enforce a state
antidiscrimination law.
The parties agree that
the state law itself is not
preempted, only the
state's enforcement
authority.
(Continued on Page 436)
CUOMO V. CLEARING HOUSE
L.L. C.
No. 08-453
ASSOCIATION,
DOCKET
ARGUMENT DATE:
The case raises issues concerning
the Chevron Doctrine and "Chevron
deference" under which courts
APRlL
28, 2009
FROM: THE SECOND CIRCUIT
435
Electronic copy available at: http://ssrn.com/abstract=1571628
Is the OCC's regulation invalid
because it is inconsistent with the
authoritative construction of the
National Bank Act in First National
Bank in St. Louis 'V. Missouri, 262
U.S. 640 (1924)?
FACTS
This case arises out of an investigation by then-Attorney General
Spitzer into possible racial discrimination by national banks located in
the state of New York with regard to
mortgage loans. In 2005, new data
became publicly available under the
federal Home Mortgage Disclosure
Act relating to race, ethnicity, gender, and income of loan applicants
as well as interest rate charged (the
HMDA data). The HMDA data do not
include all information necessary
for prudent underwriting and pricing; therefore, the data do not conclUSively establish lending discrimination in violation of New York
State antidiscrimination laws or federal antidiscrimination laws.
In March 2005, the New York attorney general's office sent "letters of
inquiry" (in lieu of formal subpoena) to national banks, including
Wells Fargo, HSBC, J.P. Morgan
Chase, Citibank, and others that are
members of the financial institution
trade association Clearing House
ASSOCiation, L.L.C. These letters
stated that each bank's II11DA data
indicated racial disparities in interest rates charged for white borrowers as compared with African
American and Hispanic borrowers.
The letters requested nonpubHc
information that could be used to
prove or disprove discrimination
with regard to real estate loans
made in New York State.
The Clearing House Association,
L.L.C., and the OCC responded by
filing separate suits in the U.S.
District Court for the Southern
District of New York on June 16,
2005. They sought to bar the New
York attorney general's investigation
because they said it infringed on
OCC's exclusive visitorial powers
over national banks. OCC had
adopted a regulation in 2004 (12
C.F.R. § 7.4000) that purports to
"clarify" and interpret federal law to
prohibit the states from going to
court to enforce state laws against
national banks. The New York attorney general filed a counterclaim
asking to have the OCC's visitorial
powers regulation declared invalid
as arbitrary, capricious, and contrary to law, under the
Administrative Procedure Act
(APA), 5 U.S.C. § 706.
of the National Bank Act:
"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 .... " The OCC,
which charters and regulates
national banks, adopted a new regulation in 2004, 12 U.S.C. § 70001,
which defines the OCC's exclusive
"visitorial powers" over national
banks and explains what the exception which subjects national banks
to the exercise of visitorial powers
"vested in the courts of justice"
means.
The suits filed by OCC and Clearing
House were consolidated. The district court dismissed the attorney
general's challenge to the OCC's regulation. The district court granted
the declaratory and injunctive relief
sought by OCC and Clearing House,
based on Chevron deference to
OCC's regulation interpreting federa1law. The OCC's interpretation
bars all state investigative and
enforcement actions, not only by
administrative proceeding but also
by filing suit in the courts, when the
state seeks to enforce state laws
dealing with lending by national
banks.
The new regulation purports to be
merely a clarification of existing law.
The 2004 regulation clearly provides
that "visitorial powers" include "(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."
A three-judge panel of the Second
Circuit Court of Appeals concluded
that the District Court did not err in
deferring to the OCC's interpretation of federal law as set forth in its
regulation. The majority opinion, in
which two judges joined, rejected
the attorney general's argument that
the OCC's'interpretation was not
entitled to Chevron deference
because it involves a preemption
determination made by the agency
in-the-ahsence-ef-a-clear-statement
of congressional intent.
CASE ANALYSIS
This case turns on the interpretation of 12 U.S.C. § 484, a provision
OCC's regulation explains the
"courts of justice" exception as follows: "National banks are subject to
such visitorial powers as are vested
in the courts of justice. This exception pertains to the powers inherent
in the judiciary and does not grant
state or other governmental authorities any right to inspect, superint~£1d, 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."
The New York attorney general
highlights_the follOwing fo:ur Leasons
for gr~nting Supreme Court review:-(I) The Second Circuit's decision
squarely conflicts with First
National Bank in St. Louis 'V.
Missouri, which held that the
436
Electronic copy available at: http://ssrn.com/abstract=1571628
Issue No.7 Volume 36
National Bank Act does not prevent
states from enforcing their own nonpreempted laws; (2) The case presents the important and unresolved
question of when, if at all, Chevron
deference is due to a regulation
declaring the preemptive scope of a
federal statute; (3) The Second
Circuit's decision profoundly shifts
the federal-state balance and
deprives states of their core sovereign power to enforce their non preempted laws against national banks;
and (4) The OCC's interpretation of
federal statute, 12 U.S.C. § 484,
effectively immunizes national
banks from enforcement of state
consumer protection and fair lending laws.
A closer analysis of both the majority and dissenting opinions from the
Second Circuit in Cuomo 'V. The
Clearing House Association sets the
stage for the Supreme Court's
review of this case. To begin, the
majority opinion clearly rejected
the attorney general's reliance on
the 1991 Supreme Court case
Gregory 'V. Ashcroft, 501 U.S. 452,
and its gUiding principle that, "If
Congress intends to alter the usual
constitutional balance between the
states and the federal government,
it must make its intention to do so
unmistakably clear in the language
of the statute."
Another threshold question for the
Second Circuit was whether a presumption against preemption should
apply. The majority concluded that,
although ordinarily a presumption
against preemption applies to regulation traditionally allocated to the
states, "this presumption 'disappears' in the context of national
bank regulation." The majority also
refused to apply the doctrine of constitutional aVOidance, which
instructs a court that, when an otherwise acceptable statutory construction would raise serious constitutional problems, the court should
construe the statute to avoid constitutional issues unless Congress
plainly intended otherwise. The
Second Circuit acknowledged a
2001 Supreme Court case noting
"heightened" necessity for a clear
statement from Congress "where
the administrative interpretation
alters the federal-state framework
by permitting federal encroachment
upon a traditional state power."
Solid Waste Agency of N. Cook
County 'V. U.s. Army Corps of
Eng'rs, 531 U.S. 159, 173. However,
the majority opinion concluded that
a clear congressional statement of
preemption was not required to justify the OCC's regulation.
Guthrie 'V. Harkness, 199 U.S. 148
(1905), represents the Supreme
Court's first interpretation of "visitorial powers" and concerned the
issue of whether the National Bank
Act precludes an individual from
bringing a lawsuit to require permission to inspect the books and
records of a national bank. The
attorney general would extend
Guthrie to permit not only a private
citizen but also a state official to
bring a lawsuit to inspect the books
and records of a national bank for a
limited purpose. The Second
Circuit's majority opinion rejects
that argument.
The Second Circuit relied on the
2007 Supreme Court decision in,
Watters 'V. Wachovia Bank, 550 U.S.
1, in upholding the OCC's regulation
in this case, even while acknowledging that Watters does not directly
address the questions at issue here.
In Watter$, a Michigan statute
required all mortgage lenders, other
than national banks, to register with
the state financial institutions regulator and make disclosures. The
Watters opinion held that state laws
are preempted with respect to operating subsidiaries of national banks
to the same extent that they are for
the national bank itself. The
Supreme Court in Watters quite surpriSingly skipped over the question
of whether the OCC regulation
there was entitled to Chevron deference and found the source of preemption in the National Bank Act
itself. The Second Circuit says that
the Supreme Court in Watters
"implied" that investigation and
enforcement by state officials are
just as much a part of visitorial
authority as the Michigan mortgage
lender registration statute. It will be
enlightening to have the Supreme
Court adopt or reject this "implication." It will also be interesting to
see whether the Supreme Court will
provide gUidance on the Chevron
Doctrine.
Further, the Second Circuit rejected
the attorney general's argument that
no deference is owed to the OCC's
regulation because it interprets
purely legal concepts rather than
technical matters within the
agency's expertise. The Supreme
Court could very well address the
issue of whether judicial deference
is warranted when a federal agency,
by regulation interpreting a federal
statute, announces preemption of a
state law. Preemption is a legal issue
rather than a technical issue.
The Second Circuit's dissenting
opinion by Judge Cardamone forcefully disagrees with the majority. His
dissent begins with his view that the
OCC has "altered the compact
between the state and national governments." One of his key concerns
is that the constitutional concept of
federalism, an "indispensable component of our free society," is at
risk. He raises Tenth Amendment
issues that were raised but dismissed in Watters.
Judge Cardamone views the
National Bank Act, not as displacing
the state banking system but rather
as establishing the dual banking system in which state and national
(Continued on Page 438)
American Bar Association
437
banks coexist in relative "competitive equality," quoting the Supreme
Court in First National Bank in
Plant City 'D. Dickinson, 396 U.S.
192 (1969). Judge Cardamone distinguishes "visitorial powers" that
include analyzing national bank's
activities under their national banking charter from what he sees as the
New York attorney general's exercise
of authority under the state's police
power to investigate civil rights violations being committed by New
York entities in New York. Judge
Cardamone finds support in the
1994 Riegle-Neal Interstate Banking
and Branching Efficiency Act for his
conclusion that Congress specifically subjected interstate branches of
national banks to the laws of their
host states in the areas of community reinvestment, consumer protection, fair lending, and intrastate
branching, including the follOWing
statement in the Conference Report:
"States have a strong interest in
the activities and operations of
depository institutions doing business within their jurisdictions,
regardless of the type of charter
an institution holds. In particular,
States have a legitimate interest
in protecting the rights of their
consumers, businesses, and communities ... Congress does not
intend that the Interstate Banking
and Branching Efficiency Act
of 1994 alter this balance and
thereby weaken States' authority
to protect the interests of their
consumers, bUSinesses, or
communities. "
First National Bank in St. Louis 'D.
Missouri, 263 U.S. 640 (1924), is a
cornerstone of Judge Cardamone's
dissent as it is for the New York
attorney general'scas~ before the
Supreme Court. In St. Louis, the
IvIissouri attorney general brought
suit against a national bank in state
court to enforce a state law prohibiting branch banking. The national
bank contended that even if the state
law could be validly applied to the
national bank, the attorney general
could not sue the national bank to
enforce it. The Supreme Court in St.
Louis upheld the attorney general's
position in that case. OCC, however,
would distinguish that case on
grounds that branch banking was not
authorized for national banks at that
time. The New York attorney general
counters that discriminatory lending
is not authorized for national banks
at this time, but the OCC argues that
the focus should be on lending itself
as a core banking function authorized for national banks rather than
the manner of performing that function illegally.
The attorney general points out that
it was not until 1966 that Congress
first gave the federal financial institution regulators, including the
OCC, power to enforce state law,
with no suggestion that the new
power to enforce state law administratively was meant to displace state
enforcement of state laws against
national banks. According to the
attorney general, OCC's regulation
adopted in 1971 expressly acknowledged the authority to require production of national bank records
using normal judicial procedures.
That regulation was broadened in
1999 to limit, for the first time, a
state's ability to enforce its own
valid and nonpreempted laws against
national banks. The New York attorney general identifies numerous
examples over the past several
decades in which the New York
attorney general has investigated
and settled cases against national
banks involving enforcement of state
consumer protection laws, pointing
out that until this case, national
banks_c_ooperat~d-yYithJ;h~attorney
general's investigations.
The OCC relies' on the Supreme
Court opinion in National Cable &
Telecommunications Ass'n 'D. Brand
438
X Internet Services, 545 U.S.
(2005), for the proposition that a
federal agency is still entitled to
Che'Cron deference even when the
agency adopts a new statutory interpretation that differs from the judicial interpretation previously
reached by a federal court. The
OCC dismisses all cases that predate the 2004 regulation on the
same grounds.
Another OCC argument is that when
the state is precluded from exercising visitorial powers over a national
bank directly, it should not be permitted to achieve the same result by
filing a lawsuit. However, the attorney general's response is that if private parties can sue a national bank
for violations of state law, the state
attorney general should not be precluded from doing so.
SIGNIFICANCE
Intriguing questions abound in this
case. As the multipliCity of amicus
briefs filed indicates, many different
interests beyond those of the OCC
and the New York attorney general
will be affected.
Particularly in light of the subprime
lending criSiS, state financial institution regulators and state attorneys
general want to protect their citizens from predatory or discriminatory lending by any financial institution doing business in their states.
Forty-nine states joined in an amic:!:ls brief opposing the OCC regulation at issue in this case. They
argue the basic prinCiples of federalism and our dual banking system.
They see the potential for incursion
on state sovereignty as highly undesirable both from a constitutional
standpoint and from the practical
perspective that state government is
closer to its own citizens and can
better address problems \vithin its
own boundaries-although they welcome additional (but not preclusive)
enforcement help from the federal
Issue No.7 Volume 36
agency. The Conference of State
Bank Supervisors sharply questions
whether the OCC has the resources
or the will to be the primary
enforcer of 50 different state consumer protection and antidiscrimination statutes. State regulators are
troubled that the OCC uses its power to preempt state laws for national
banks as a marketing tool to recruit
banks to the national charter,
which they characterize as a selfinterested campaign to expand the
OCC's jurisdiction. They perceive
that the OCC has issued a series of
preemption opinions, regulations,
and positions in litigation that constitute a deliberate, step-by-step
accretion of power to the federal
agency and a concomitant diminishment of traditional state authority.
The presumption against preemption is important to the states and
they contend that there should be
no special exception for the OCC.
The OCC staunchly contends that
Congress intends it to be the sole
regulator of national banks. Any
state intrusion could result in conflicting requirements, enforcement
poliCies, and expertise. This would
be difficult and costly for national
banks with nationwide operations,
and the increased costs would fall on
consumers. The agency argues that
lending is a core banking activity
authorized for national banks and
only the OCC can address violations
of state or federal law committed in
the exercise of this basic banking
function. Further, the OCC cites
extensive case law deferring to the
OCC. The OCC emphasizes that it
does actively enforce state consumer
protection laws and that it does
cooperate \vith state regulators in
doing so.
Congress is also looking over the
shoulders of the federal banking regulators and will be taking account of
the Supreme Court's opinion in this
case, regardless of the outcome.
American Bar Association
This case gives the Supreme Court
an opportunity to answer questions
left open in its 2007 opinion in
Watters '0. Wachovia Bank. Because
the Watters opinion relied on the
National Bank Act itself, the Court
did not directly answer questions
concerning deference to a federal
agency under the Oh€'Oron Doctrine.
Administrative lawyers in every
practice area, not just financial
institutions, will be waiting with
bated breath for whatever may
come out of this case in terms of
Ohevron deference analysis. The
Watters decision was five to three,
with a vigorous dissent, and Justice
Thomas did not partiCipate. As a
result, the tea leaves indicate that
this case could go either way.
ATTOlli~YS FOR THE
PARTIES
For Petitioner Andrew M. Cuomo,
Attorney General of New York
(Barbara D. Underwood (212) 4168016)
For Respondent Clearing House
Association, L.L.C. (Seth p.
Waxman (202) 663-6000)
For the Federal Respondent (Elena
Kagan (202) 514-2217)
AMIGGS BRIEFS
In Support of Petitioner Andrew
M. Cuomo, Attorney General of
New York
American Association of
Residential Mortgage Regulators
(Stefan L. Jouret (617) 951-2300)
Center for Responsible Lending
et aL (Eric Halperin (202) 3491850)
Comptroller of the City of New
York (Lewis S. Finkelman (212)
669-2048)
Conference of State Bank
Supervisors (DaVid T. Goldberg
(212) 334-8813)
Connecticut Fair Housing Center
(Jonathan R. Macey (203) 4327913)
439
Lawyers' Committee for Civil
Rights Under Law et al. (Amy Howe
(301) 941-1913)
.Ylembers of Congress (Linda
Singer (202) 778-1800)
North American Securities
Administrators ASSOCiation, Inc.
(Keith R. Fisher (603) 513-5174)
National Association of Realtors
(David C. Frederick (202) 3267900)
National Governors Association
et al. (Richard Ruda (202) 4344850)
~orth Carolina et al.
(Christopher G. Browning Jr. (919)
716-6900)
In Support of Respondent Clearing
House Association, L.L.C.
All Former Comptrollers of the
Currency since 1973 (Drew S. Days
III (202) 887-1500)
American Bankers Association et
al. (Theodore B. Olson (202) 9558500)
The Chamber of Commerce of
the United States of America (Sri
Srinivasan (202) 383-5300)
Financial Services Roundtable
(Robert A. Long Jr. (202) 662-5212)