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Supreme Court Allows State Enforcement of Fair Lending Laws Against National Banks

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On the last day of the 2008 term, the U.S Supreme Court issued its opinion in the much-anticipated Cuomo v. Clearing House banking case. Justice Scalia, writing for the Court in a 5-4 decision, held that judicial enforcement of state laws, such as the New York fair lending law, at issue here, was not preempted by a regulation issued by the Comptroller of the Currency. The Justices in the majority are an odd combination: Scalia, Breyer, Ginsburg, Souter, and Stevens. Justice Thomas wrote a long dissent arguing that the state enforcement was blocked by federal law. Thomas' dissent was joined by the Chief Justice and Justices Alito, and Kennedy.

I attended oral argument in this case. During the argument the Chief Justice made his objection to the New York enforcement effort clear. Justice Scalia was just as vociferous in opposition to the preemption claims by the Comptroller of the Currency. So, two votes in the case were not a surprise.

The Cuomo case was an important test of vigorous state enforcement of consumer protection laws during the housing bubble.

The AGs of 49 states supported the position of New York in this case. A near-universal criticism of the federal response to the developing subprime mortgage crisis was that it was weak and ineffectual. Friend of the Court briefs submitted in the case paint a picture of a woefully understaffed Office of the Comptroller of the Currency, compared to the aggressive consumer protection approach and much larger enforcement staffs of the state Attorneys Generals. So, the claim of preemption served as a blocking action to take down the only aggressive enforcement of fair lending laws available at the height of the housing boom of 2004-2008 when reckless lending practices that became a feature of this period.

In 2005, at the peak of the subprime home mortgage lending abuses, Attorney General Eliot Spitzer sent letters to a group of national banks, doing business in NY, requesting non-public data about the racial patterns of home mortgage lending in that state. The letters were sent asking for voluntary disclosure of the requested information, backed up by the potential for judicially enforced subpoenas, if the banks chose not to comply with the voluntary request.

The NY Attorney General sought to collect records about the racial characteristics of home loans from the internal records of the banks themselves. The background for this investigation is the subprime mortgage crisis that by 2006 was beginning to reach deeply into virtually every community.

African American borrowers in New York had been especially hard hit. Studies from New York University researchers, the NYT analyses of mortgage data and pro consumer non profits such as Acorn and the Center for Responsible Lending showed that even at higher income levels, black and Hispanic borrowers in New York were far more likely than white borrowers with similar incomes and mortgage amounts to receive a subprime loan. The default and foreclosure rate for subprime loans were dramatically higher than for prime loans.

The federal Office of the Comptroller of the Currency and a banking trade group went to court to block the request for records that could establish whether there were violations of fair lending laws. They argued that national uniformity required that there be only a single regulator for national banks, like Citibank, Bank of America, and J.P. Morgan Chase, for example. The district court issued an injunction against the request for information and the Second Circuit agreed.

Now, four years after the letters were issued, the systemic risk arising from subprime mortgages is clear. The case is important because it provides a pathway for states to play an important role in reigning in abusive practices by national banks. Some of the most offensive home lending practices have already been regulated last year by the Federal Reserve Bank. The value of this opinion to consumers will be tested in the future, if new violations by national banks emerge. This decision sets up a healthy competitive tension between federal and state enforcement efforts. Consumers can only benefit from that competition of enforcement practice, ideology, and effectiveness