On December 4, 2007, the U.S. Court of Appeals for the Second Circuit, in a 2-1 opinion, generally upheld two U.S. District Court for the Southern District of New York (“SDNY”) decisions. The effect was to enjoin the New York Attorney General’s office from continuing its investigation into several national banks’ Home Mortgage Disclosure Act (“HMDA”) data. At the same time, the Second Circuit vacated a permanent injunction over the New York Attorney General’s enforcement of the Fair Housing Act, noting some instances where the Attorney General may possibly bring an action.
The Second Circuit fully upheld the SDNY’s decision in Office of the Comptroller of the Currency v. Spitzer, 1/ which deferred to the OCC’s regulations clarifying the scope of visitorial powers solely within the purview of the OCC, and therefore enjoined the New York Attorney General’s office from continuing its investigation into several national banks’ Home Mortgage Disclosure Act (“HMDA”) data. The Second Circuit also affirmed the portion of the decision by the SDNY in Clearing House Ass’n, L.L.C. v. Spitzer, 2/ that the Fair Housing Act did not create an exception to the National Bank Act’s prohibition on the New York Attorney General’s exercise of visitorial powers over a national bank. However, the Second Circuit vacated the SDNY’s permanent injunction over the New York Attorney General’s enforcement of the Fair Housing Act, noting some instances where the Attorney General may bring an action, such as exercising his parens patriae authority to bring suit under the Fair Housing Act, were not yet ripe.
The cases arose when the New York Attorney General began conducting investigations of national banks’ alleged noncompliance with New York fair lending law. The Attorney General based the investigation on his analysis of the publicly available HMDA data reported by the banks. The Attorney General requested extensive documentation on the mortgage lending practices of several national banks operating in New York. The New York Clearing House Association, on behalf of its members, and the OCC sought to enjoin the Attorney General from continuing the investigation and document production requests, as prohibited by the National Bank Act, which vests, with limited exception, sole visitorial authority over national banks with the OCC. Section 484(a) of Title 12 of the United States Code states that:
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 the Congress or by either House thereof or by any committee of Congress or of either House duly authorized. 3/
The statute does not, however, define visitorial powers. The OCC adopted regulations codifying the definition of visitorial powers for purposes of Section 484. The OCC’s definition of visitorial powers that are not available to state officials includes inspection of a national bank’s books and records, supervision of its activities, and enforcing compliance with applicable federal or state laws concerning a national bank’s authorized activities. The OCC’s regulation also states that the courts of justice exemption is a statement on the inherent powers of the judiciary “and 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.” 4/ To be clear, neither the Clearing House nor the OCC argued that the New York fair lending law was preempted, just that investigation and enforcement of it are inherently part of the visitorial powers which are granted to the OCC and prohibited to others.
The Second Circuit’s majority opinion draws heavily upon the Supreme Court’s recent decision in Watters v. Wachovia Bank, N.A. 5/ The majority noted that the Supreme Court has consistently upheld that state regulation, registration, or visitation of national banks is preempted within the scope of National Bank Act, and that the Supreme Court made clear that state regulation, registration, or visitation of national bank operating subsidiaries is preempted to the same extent as if the state action were being applied to the national bank itself. The court noted that:
It seems clear to us after Watters, that investigative and enforcement powers of the type the Attorney General has sought to exercise here are at least in some sense “visitorial,” whether or not they unambiguously fall within the scope of § 484(a). Moreover, we are not prepared to conclude, as the Attorney General urges us to, that simply because a state statute is not substantively preempted by a contrary federal law, enforcement of that statute by state officials against national banks is necessarily permitted under § 484(a). 6/
The Cuomo cases bolster the OCC’s preemptive authority even further than the Supreme Court did in Watters. In Watters, the Supreme Court did not address whether the OCC’s regulations should be given deference under Chevron U.S.A., Inc. v. Natural Resources Defense Council, 7/ instead concluding that the plain language of the National Bank Act preempted the State of Michigan registration requirements for national bank operating subsidiaries. In Cuomo, the majority (after a paragraph of verbal hand wringing, noting the OCC’s analysis in connection with the visitorial powers regulations is “at or near the outer limits of what Chevron contemplates”) concluded that the OCC’s regulation defining visitorial power is a reasonable reading of the National Bank Act not inconsistent with judicial precedent and thus due Chevron deference.
In giving deference to the OCC visitorial powers rule, the Second Circuit rejected the Attorney General’s argument that even if prohibited from directly enforcing the New York fair lending law, he could file suit using the “vested in the courts of justice” exception to Section 484’s prohibition. The Second Circuit majority called the Attorney General’s argument too broad, noting “[i]f a state official could sidestep the Act’s restriction on the exercise of visitorial powers simply by filing a lawsuit, the exception would swallow the rule.” 8/ The court found the OCC’s regulation a more reasonable interpretation that comports with the text of the statue, balancing the inherent authority of the courts to invoke visitorial powers, such as issuing subpoenas, but not “positively grant[ing] authority to state officials to accomplish what § 484(a) otherwise forbids by invoking the power of the courts.” 9/ Moreover, the court noted that the OCC’s visitorial powers regulation and Section 484 do not prevent private parties and the OCC itself from enforcing New York’s fair lending law.
The dissent did not believe that the OCC’s definition and interpretation of the limits to state officials’ exercise of visitorial power was due Chevron deference. The dissent noted that the power to enforce one’s own laws is at the very heart of sovereignty, and “limiting the power of the state to enforce applicable state law … [heavily tilts] the usual constitutional balance of power … towards the federal government, and the Tenth Amendment is put in peril.” 10/ In light of this disruption to the Constitutional balance of power between the states and the federal government, the dissent would require a clear statement of Congressional purpose before granting the OCC’s regulation and interpretation deference, and therefore would have overturned the SDNY’s decisions enjoining the Attorney General’s investigations.
Cuomo, combined with Watters should settle the issue that states, such as New York, have little to no regulatory or enforcement authority over national banks’ activities authorized by the National Bank Act. Even in instances where state law is not preempted, enforcement authority lies with the OCC. This decision is another in a long line of cases preserving a national bank’s shield from unduly burdensome and duplicative state regulation, and further strengthening the national bank charter.