New York Attorney General May Enforce State Laws Against National Banks  

On June 29, 2009, the United States Supreme Court (Court) held in a 5-4 decision that states may exercise law enforcement power over national banks for some state laws. Justice Antonin Scalia, writing for the majority in Cuomo v. Clearing House Association, L.L.C et al., U.S. No. 08-453, said that although state attorneys general lack the visitorial powers of the Office of the Comptroller of the Currency (OCC) to examine national banks pursuant to the National Bank Act (NBA), state attorneys general can sue national banks for alleged violations of state laws.  

The Court’s holding means that the NBA’s grant of visitorial powers to the OCC does not prohibit states from exerting law enforcement power over national banks but does prohibit states from issuing an executive subpoena to obtain information from such banks.  

In the one-vote majority opinion authored by Justice Scalia, the Court concluded that the OCC’s regulation broadly defining the scope of its visitorial powers was an unreasonable interpretation of the NBA to the extent that it purported to preempt state law enforcement of national banks through the courts.  

The Cuomo v. Clearing House holding represents a rare loss in a preemption matter for the OCC. In advance of anticipated major regulatory reforms for the entire U.S. financial industry, this case is likely to have a significant impact on the complexity and costs of compliance by national banks doing business in multiple states.  

Background  

In 2005, the New York Attorney General (NYAG) sent “letters of inquiry” to several national banks. “In lieu of issuing a formal subpoena,” the letters requested non-public information about these banks’ lending practices. The NYAG requested this information as part of an investigation of whether the national banks had violated New York’s fair-lending laws in residential real estate lending practices by discriminating against minorities.

Under the NBA, visitorial powers over national banks rest exclusively with the OCC and “no national bank shall be subject to any visitorial powers except as authorized by Federal law.”1 The OCC regulation defines the term “visitorial powers” to include:  

  1. Examination of a bank;
  2. Inspection of a bank’s books and records;  
  3. Regulation and supervision of activities authorized or permitted pursuant to federal banking law; and  
  4. Enforcing compliance with any applicable federal or state laws concerning those activities.2  

The OCC and the Clearing House Association, a consortium of national banks, brought suit to enjoin the Attorney General’s information request, contending that the investigation was an unlawful exercise of visitorial powers.  

The United States District Court for the Southern District of New York agreed with the OCC and the Clearing House Association and granted an injunction prohibiting the NYAG from enforcing state fair-lending laws through either demands for records or judicial proceedings. The United States Court of Appeals for the Second Circuit affirmed.3  

The Supreme Court’s Analysis  

The Court held that the OCC’s regulation was not due any deference because its interpretation of the term “visitorial powers” to preempt the state’s judicial enforcement power was unreasonable. However, the Court sustained the injunction granted by the lower courts with regard to the NYAG’s use of executive subpoenas.  

The Court acknowledged that the OCC’s interpretations of terms, particularly those with an element of uncertainty or ambiguity, usually receive deference from the Court. In this case, the majority conceded that the term “visitorial powers” referenced in the NBA was ambiguous as to the actual powers granted. Visitation has long been understood as the government’s right to examine and supervise the affairs of a corporation, as well as to include state administrative oversight actions that allow states “to inspect books and records on demand.”  

After the Court acknowledged that visitorial powers clearly include the power to supervise, the discussion turned to whether they also include law enforcement power. The Court noted that it would be “unusual” and “bizarre” if a state could have valid laws affecting banks with no way to enforce them. If a state statute is valid, it must be enforceable as well. The majority opinion stated that visitation is “quite separate from the power to enforce the law.” When a state attorney general “brings suit to enforce state law against a national bank,” he is not acting in his capacity as a “supervisor,” but in his role as a law-enforcer. Moreover, an attorney general enforcing state laws through the courts against a national bank would be “treated like a litigant” and would be subject to all applicable rules of procedure.  

The Court distinguished between the NYAG’s law enforcement power and the threat of an executive subpoena issued by the NYAG “based on his own authority.” While the latter is included in the NBA’s limitation on state power, the former is not. Accordingly, the Court affirmed the injunction of the lower courts to the extent that it prohibited the state from issuing executive subpoenas but reversed the injunction to the extent that it prohibited the Attorney General “from bringing judicial enforcement actions.”  

Justice Thomas authored the dissent which was joined by Chief Justice Roberts and Justices Kennedy and Alito. The dissent stated that the OCC’s interpretation of visitorial exclusivity was reasonable and as such was due deference and it was not the Court’s place to override the OCC in favor of the Court’s own interpretation.  

Discussion  

The Court’s holding in Cuomo v. Clearing House Association marks the first loss the OCC has suffered in its interpretation of preemption applicable to national banks after a number of victories in the Court.  

The majority opinion made clear that this was in no way a rejection of the 2007 ruling in Watters v. Wachovia.4 Rather, the Cuomo v. Clearing House decision distinguishes enforcement of state laws through the courts from statutes requiring national banks to register or turn over records to state administrative agencies.  

The Cuomo v. Clearing House decision sets a limit to the OCC’s preemption of state authority. When combined with the Obama administration’s proposal to create the Consumer Financial Protection Agency (CFPA), the Cuomo v. Clearing House decision may mark a significant increase in the cost and complexity in the operations of multi-state national banks. The CFPA, as envisioned by the Obama administration, would have rule-making authority that is meant to serve as a floor and explicitly allow state law to offer additional protections. Even if the CFPA is not enacted as proposed, national banks will likely face a more complex compliance environment given the possibility that the decision may spur a rush of state lawsuits against national banks, and the need to evaluate compliance on a state by state basis.