On June 29, the U.S. Supreme Court issued its long-awaited opinion in Cuomo v Clearing House Association, a case that presented the question of whether the Attorney General of the State of New York validly could seek to enforce New York's lending laws in the face of a Comptroller of the Currency regulation that forbade the exercise of visitorial powers to any entity but itself. Distinguishing between visitorial powers, which are granted to the Office of the Comptroller of the Currency (OCC) by the National Bank Act, and a sovereign state's power to enforce the law, the high court concluded that the National Bank Act does preempt state action with respect to visitorial powers, but not with respect to the enforcement of state law. However, in so concluding, the Court dramatically cut back on the OCC's own definition of its visitorial powers.
Section 484(a) of the National Bank Act states that “[n]o national bank shall be subject to any visitorial powers except as authorized by Federal law, vested in the courts of justice...” Pursuant to that statute, the OCC passed, after proper notice and comment, a regulation further describing and interpreting its visitorial powers. In addition to examination and inspection of the books and records of a national bank, the OCC claimed the sole ability to regulate and supervise and to enforce compliance with federal and state laws. Rejecting the familiar defense that where ambiguity exists as to the meaning of a term (in this case, the meaning of “visitorial powers”) a court must defer to a reasonable interpretation of the statute even if it is not the best interpretation, the Court held that the OCC went too far in claiming for itself the sole right to enforce compliance with law. In the words of the Court, “[w]e can discern the outer limits of the term ‘visitorial powers’ even through the clouded lens of history. They do not include, as the Comptroller's expansive regulation would provide, ordinary enforcement of the law.”
In so deciding, the Court distinguished its recent holding in Watters v. Wachovia Bank, N.A., which held that a state may not exercise general supervision and control over the wholly owned subsidiary of a national bank, stating that “’[g]eneral supervision and control... are worlds apart from law enforcement.” The Court concluded its discussion of the issue by stating that “the unmistakable and utterly consistent teaching of our jurisprudence... is that a sovereign's ‘visitorial powers’ and its power to enforce the law are two different things... And contrary to what the Comptroller's regulation says, the National Bank Act pre-empts only the former.” As the Court explained:
On a pragmatic level the difference between visitation and law enforcement is clear. If a state chooses to pursue enforcement of its laws in court, then it is not exercising its power of visitation and will be treated like a litigant. An attorney general... must file a lawsuit, survive a motion to dismiss, endure the rules of procedure and discovery, and risk sanctions if his claim is frivolous or his discovery tactics abusive... A visitor, by contrast, may inspect books and records at any time for any or no reason.
By confirming the preemptive effect of visitorial powers but limiting their breadth, the Court's decision opens a wide world of potential litigation against national banks to state attorneys general should they believe that a national bank located in their jurisdiction is not complying with substantive state law. While undoubtedly those concerned with the advantages that national banks have long enjoyed in the preemption area will attempt to limit the effect of the Court’s ruling, arguably the balance of power, at least for the moment, has shifted to the state legislatures that draft substantive laws and to the state attorneys general that seek to enforce them.
It remains to be seen what effect the case will have on federal savings banks regulated by the Office of Thrift Supervision (OTS), which draws its power not from the National Bank Act, but from a different statute, the Home Owners Loan Act. It should also be noted that the Obama Administration has proposed a merger of the OCC and the OTS, and presumably the issue of if and to what extent preemption will exist for banks with a federal charter (post merger) will need to be addressed.