States Can Investigate National Bank Lending

(CN) - In a decision consistent with a new era of increased public oversight of large financial institutions, the U.S. Supreme Court ruled Monday that national banks are subject to some state laws under the National Bank Act.

The 5-4 ruling could broaden the powers of state attorneys general to regulate banks with branches in multiple states, allowing states to enforce their own consumer and fair-lending laws so long as they go to court to do so.

A state attorney general cannot issue executive subpoenas against a national bank -- as former New York Attorney General Eliot Spitzer threatened to do in 2005 in an effort to discover if some banks had issued an inordinate number of subprime mortgages to minorities -- but that does not preclude a state from "bringing judicial enforcement actions" against national banks, the court ruled.

Spitzer sent letters to several national banks operating in New York, requesting non-public information regarding their lending practices, saying that the request came "in lieu of a subpoena." The U.S. Treasury Department's Office of the Comptroller of the Currency and a banking trade group tried to block the request, claiming that the 1864 National Bank Act bars states from enforcing their own laws against national banks.

The district court sided with the OCC, effectively prohibiting states from enforcing their own fair-lending laws through records requests or lawsuits. The 2nd Circuit affirmed that decision, and the high court agreed to hear the case.

The issue came down to whether or not the OCC's "regulation purporting to pre-empt state law enforcement can be upheld as a reasonable interpretation of the National Bank Act," Justice Scalia wrote in the majority opinion. While the OCC certainly has "visitorial powers" -- the right to examine the affairs of a corporation -- that does not mean that it has the exclusive right to enforcement, the court ruled.

"A sovereign's 'visitorial powers' and its power to enforce the law are two different things," Scalia wrote. "Contrary to what the (OCC's) regulation says, the National Bank Act pre-empts only the former."

Scalia added that states "have always enforced their general laws against national banks -- and have enforced their banking-related laws against national banks for at least 85 years."

Writing in dissent, Justice Thomas, joined by Justices Kennedy and Alito and Chief Justice Roberts, argued that the scope of visitorial powers is ambiguous and that "it was reasonable for the OCC to interpret the term to encompass state efforts ... to enforce fair-lending laws against national banks."

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