The old argument in favor of states’ rights is as clear as it is timeless: in the absence of any overarching federal or national regulation, it is and ought to be up to individual states to enforce rules and establish laws (or not) as they see fit.
It’s an argument we generally stand behind, even as our own state decides that what is best is to increase taxes and strangle growth with countless regulations that slow development to a snail’s pace.
At first blush, then, we’re inclined to cheer a recent Supreme Court ruling potentially subjecting nationally chartered banks and lenders to various state ethics and consumer protection laws.
After all, why shouldn’t a bank that does business in a state be subject to that state’s laws? Those laws exist for a reason, and, as Supreme Court Justice Antonin Scalia eloquently put it, blocking states from enforcing their unique laws handicaps them such that “the bark remains, but the bite does not.”
Scalia’s argument is compelling, and it was ultimately his vote that swung the Supreme Court onto the side of the states, and away from the status quo. At least partially gone now is more than 140 years of jurisdiction over federal banks by the Office of the Comptroller of the Currency.
But not all of the OCC’s jurisdiction is gone, not by a long shot.
The ruling in Cuomo v. Clearinghouse draws a marked distinction between the so-called “role of sovereign-as-supervisor,” held by the OCC, and the “role of sovereign-as-law-enforcer,” in this case, state attorneys general.
According to the court, the OCC still has jurisdiction in investigating suspected wrongdoing on behalf of nationally-chartered banks, and indeed, keeps the door open for counter-litigation against states that bring unfounded or frivolous suits against said banks.
What the ruling does give states is the ability to compel the OCC to force banks to comply with certain state statutes, should they so desire. It is this last bit that has us so bemused, if not outright confused.
Prior to the ruling, states could only petition the OCC to enforce various statutes or investigate banks, and it was up to the OCC to decide whether to comply. Now, seemingly, the OCC could be forced by a judge to honor states’ petitions.
Which is good, we guess, but we’re not so sure this ruling has changed the banking regulatory landscape as dramatically as some of the recent hype may have suggested.
In the past, states have hardly needed the perceived re-enforcement inherent in the new ruling. The power of the bully pulpit was all the influence needed for action. Even more so nowadays, when big, nasty, heartless banks can do no right, and the outcry for all things consumer-friendly has reached a fever pitch, the OCC would be foolish not to give in to a state’s demands.
Recently, led by the ubiquitous and seemingly unstoppable New York Attorney General Andrew Cuomo, and in the absence of any explicit ruling in their favor, states have rung off a string of victories against the biggest national players.
In October, a coalition of 11 attorneys general (including our own Martha Coakley) settled with Bank of America, parent of what was then called Countrywide Financial, forcing Countrywide to modify up to 400,000 mortgages originated by the company in the largest predatory lending settlement in history.
Ask Bank of America if the potential $8.4 billion in interest-rate and principal reductions it was forced to swallow as a result of the settlement was only a meaningless bark, and not a bite right out of its already precarious bottom line.
Or ask Citibank how impotent states were after an August settlement, again led by Cuomo, that forced the struggling financial behemoth to buy back $7.3 billion in bonds sold to retail and small-business customers.
So while we won’t go so far as to say all of the outcry from banking proponents about still more bank regulation is much ado about nothing, we do think it is much ado about not a whole lot.
We think the regulatory game has really just begun, so we’re not ready to call these first few plays any kind of game changer.
