Compliance Bulletin

Clearing House Association v. Cuomo: Preemption at the Crossroads
July 20, 2009

The U.S. Supreme Court’s decision in Cuomo v. The Clearing House Association is the latest in a series of developments that raise questions about the continued ability of national banks to invoke federal preemption of state laws. National banks and the OCC have enjoyed a string of favorable decisions interpreting the National Bank Act and OCC regulations in recent years. Only two years ago in Watters v. Wachovia Bank, the Supreme Court seemed to have solidified the winning streak when it held that state regulators were prohibited from exercising administrative (i.e., visitorial) authority over national bank subsidiaries.

The Decision

In the 5-4 Cuomo decision whose majority composed of the Court’s liberal bloc and the decision’s author, the conservative Justice Scalia, the Court invalidated an OCC regulation that broadly bars states from enforcing their own laws against national banks. The regulation states that state officials may not exercise visitorial powers with respect to national banks, which includes “prosecuting enforcement actions [1].” The Court found it “bizarre” that the OCC admits that certain state laws apply to national banks but states are prohibited from enforcing them under the OCC’s visitation rule.

The case arose when the former New York Attorney General Eliot Spitzer issued to several banks a request “in lieu of a subpoena” to disclose information related to their lending practices. The request was part of an investigation into whether banks were violating state fair lending laws. The OCC and the Clearing House Association brought suit to seek an injunction based on the OCC’s visitorial powers rule.

After decisions in the District Court and Second Circuit Court of Appeals in favor of the OCC’s position, the Supreme Court affirmed that the attorney general’s informal request was an improper infringement of the OCC’s visitorial powers. This is because the state’s information gathering exercise amounted to its acting as “sovereign-as-supervisor,” which is within the ambit of the concept of “visitation.” However, visitation is no bar to a state when it acts in its capacity as “sovereign-as-law-enforcer” in which it seeks court action to enforce its laws upon a national bank. Any fears about a state exercising undue authority over national banks would be tempered by the normal rules of discovery under the authority of a trial judge.

The major thrust of Cuomo may be that the visitation rule would not bar state (and probably local) enforcement agencies from bringing suits against national banks. States would still not be permitted to carry out investigatory fact-finding activities in anticipation of litigation, but proffering sufficient allegations to support a complaint is usually not difficult, and advancing a suit would be supported by rights of discovery.

The State of Preemption

The decision on its face does not seek to color the existing judicial decisions that interpret the National Bank Act and OCC regulations as to substantive preemption. Generally, courts have found that state and local laws are preempted if they significantly impair the ability of national banks from exercising their federal powers. “The history and structure of the NBA thus teach that the federal statute displaces all state laws that ‘impair [the] efficiency’ of national banks’ exercise of their federally authorized powers, both express and incidental.” Barnett Bank of Marion County, N.A. v. Nelson, 517 U.S. 25, 33-34 (1996).

Presumably, state laws that have been judicially determined to be preempted (such as California’s credit card minimum payments law [2] pursuant to ABA v. Lockyer) remain preempted. The Cuomo decision substantively addresses what is or isn’t preempted only in the context of how the OCC asserts the visitorial powers clause. In his opinion, Scalia observes, “Any interpretation of ‘visitorial powers’ necessarily declares the pre-emptive scope of the NBA. What is clear from logic is also clear in application: The regulation declares that ‘state officials may not . . . prosecute enforcement actions.’ If that is not pre-emption, nothing is.” [Internal citations omitted].

Other Factors

Looking forward, whatever authority that the OCC may exercise will likely be significantly affected by a number of other developments. First, the OCC recently announced its intention to re-write its preemption statute in light of Cuomo. The agency’s decision is likely prompted also by the second development—the Obama Administration in May this year expressed its policy interest in supporting state laws by, among other things, instructing the heads of departments and agencies to avoid regulatory preemption of state laws [3]. The departments and agencies are to review and re-evaluate regulations issued within the past 10 years in order to decide whether their preemptive effects are warranted.

Third, drafts of the legislation to establish the Consumer Financial Protection Agency (CFPA) include provisions to strip away the preemptive effect of federal consumer protection laws and regulations. States will be explicitly allowed to establish more stringent standards. Indeed, states (together with the CFPA and other federal agencies) would have joint authority to enforce federal laws and regulations. The proposals would even permit states to do what the Supreme Court would not allow—let states obtain information from national banks (and federal thrifts) outside of litigation in order to determine whether state or federal requirements have been violated.

Depending on the outcome of the CFPA, the upshot of all this may be that national banks that operate interstate may become subject to multiple, conflicting laws and regulations, and to actions by state and local enforcement officials. State-chartered banks also stand to be harmed by Cuomo to the extent that federal preemption by national banks is less likely to be successfully raised as a defense against more extreme laws and regulations, such as local ordinances earlier this decade to ban ATM surcharges and to establish financial privacy standards.

Precautions

California has a number of laws of both general and specific application to banks that, unlike the credit card minimum payments law discussed above, may not have been subject to a definitive NBA preemption challenge. Among them are, in the area of employment and housing, the Fair Employment and Housing Act beginning at Government Code 12900; the state’s predatory lending statute beginning at Financial Code Section 4970, the Holden Credit Denial Disclosure Act of 1976 beginning at Civil Code Section 1787.1; the Unruh Civil Rights Act at Civil Code Section 51; and the Holden Act (redlining) at Health & Safety Code Section 35800. In many cases, the requirements of these laws are met through compliance with similar requirements under federal laws, regulations, and guidelines. The risk now is that a state or local enforcement agency is not precluded from bringing an enforcement action against a national bank on the basis of prohibited visitation; however, a bank may still defend based upon the body of substantive preemption case law if the law in question impairs the ability of the bank to exercise its federal powers.

  1. 12 CFR. Section 7.4000(a)(1).
  2. See California Civil Code Section 1748.13.
  3. See the Administration’s website at: http://www.whitehouse.gov/the_press_office/Presidential-Memorandum-Regarding-Preemption/

The information contained in this CBA Regulatory Compliance Bulletin is not intended to constitute, and should not be received as, legal advice. Please consult with your counsel for more detailed information applicable to your institution.

© This CBA Regulatory Compliance Bulletin is copyrighted by the California Institutioners Association, and may not be reproduced or distributed without the prior written consent of CBA.

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