The U.S. Supreme Court has rejected the Office of the Comptroller of the Currency’s (“OCC’s”) broad view of its visitorial powers under the National Bank Act (“NBA”) in the Court’s highly anticipated decision in Cuomo v. The Clearing House Association, LLC, No. 08-453, 557 U.S. --- (2009). Although the OCC lost its argument that it has the sole power to enforce state fair-lending and consumer protection laws with respect to national banks, the Court in effect reaffirmed the OCC’s exclusive power to inspect national banks. Writing for the majority in a 5-4 decision, Justice Scalia held that the OCC’s preemption regulation is not a reasonable interpretation of the NBA to the extent that it would bar States from bringing lawsuits against national banks to enforce state fair-lending and consumer protection laws. The Court did find the OCC’s regulation reasonable to the extent that it preempts States from issuing “executive subpoenas” or undertaking other supervisory or regulatory enforcement efforts with respect to national banks.

What this Case Really Means

The Clearing House Association decision reaffirms the OCC’s exclusive authority to examine national banks, inspect their books and records, and undertake supervisory and investigatory efforts relating to activities authorized or permitted under the federal banking laws. That decision also clarifies that the OCC’s authority does not preclude States from bringing lawsuits to enforce their fair-lending laws notwithstanding the OCC’s views regarding whether they should pursue such actions. Thus, The Clearing House Association could potentially:

(i) further encourage States to exercise “oversight” of national banks since, in practice, the distinction between supervision and enforcement may be quite nuanced;

(ii) usher in a new era of increased litigation between States and national banks;

(iii) foster duplicative systems of regulation, particularly when it comes to consumer protection;

(iv) increase the cost of compliance, particularly for nationwide lenders, which will ultimately be passed on to consumers;

(v) create pressure on Congress to address the scope of federal preemption in the banking industry, particularly if Congress endeavors to create a federal consumer protection agency, as Treasury has recommended; and/or

(vi) compel federal and state regulators to enter into regulatory treaties to allocate responsibilities among themselves, as they have in the past.

Background of the Case

The dispute in The Clearing House Association arose out of the New York Attorney General’s (“AG’s”) investigation into home mortgage lending practices. The AG sent inquiry letters to national bank mortgage lenders and their operating subsidiaries requesting loan data and non-public information regarding their mortgage lending policies and practices. The OCC and The Clearing House Association, a trade group of national banks, each filed a lawsuit to enjoin the AG’s investigation and the issuance of executive subpoenas on the grounds that the NBA and OCC regulations preempted those actions. The plaintiffs relied upon the visitation authority bestowed on the OCC by the NBA as well as the OCC’s implementing regulation, which provides that, except in limited circumstances, “[o]nly the OCC or an authorized representative of the OCC,” but not state officials, “may exercise visitorial powers with respect to national banks.” 12 C.F.R. § 7.4000. The OCC’s regulation defines “visitorial powers” to include examining banks, inspecting their books and records, and enforcing federal and state laws, which the OCC viewed as including both regulatory and judicial enforcement efforts. The district court held in favor of the plaintiffs and issued an injunction against the AG. The Second Circuit Court of Appeals affirmed that decision.

The Court’s Opinion

In an opinion written by Justice Scalia on behalf of a narrow majority, the Supreme Court affirmed in part and reversed in part the Second Circuit’s decision. Relying upon the historical understanding of the term “visitorial powers,” Supreme Court precedent, and principles of statutory interpretation, the Court held that the OCC’s regulation was not a reasonable interpretation of the NBA. The Court explained that a sovereign’s visitorial powers and its powers to enforce the law are distinct, and that the NBA only preempts States from exercising the former, but not the latter.

The Court pointed to the “pragmatic” difference between visitation and examination of national banks and a State’s authority to enforce its laws. The OCC reasonably interpreted the NBA’s visitorial powers provision as preempting States’ efforts to act as supervisors in examining and inspecting national banks and requiring them to produce books and records, but did not reasonably interpret the NBA in extending the definition of “visitorial powers” to encompass lawsuits by States’ attorneys general to enforce state laws against national banks. Since the AG’s request for information implicitly threatened that the AG would issue an executive subpoena rather than bring a civil lawsuit if the banks failed to comply, the NBA preempted the AG’s actions. Thus, the Court affirmed the trial court’s injunction but vacated that ruling to the extent that it prohibited the AG from enforcing the State’s fair-lending laws in court.

The Clearing House Association follows on the Supreme Court’s recent decision in Watters v. Wachovia Bank, N.A., 127 S. Ct. 1559 (2007), in which the Court held that a national bank’s mortgage business, regardless of whether it is conducted by the bank or its operating subsidiary, is not subject to state licensing, reporting, or visitorial regimes. In Watters, the Court held that the NBA granted the OCC the authority to oversee “the operations of national banks and their interactions with customers” and that “federal control shields national banking from unduly burdensome and duplicative state regulation.” The Court emphasized, however, that national banks may be subject to state laws of general applicability that do not conflict with the NBA and that States may regulate the activities of national banks and their operating subsidiaries if doing so would not significantly interfere with the exercise of banks’ enumerated or incidental powers under the NBA.