Court: States can challenge banks

WASHINGTON – State governments can challenge the practices of national banks in court, the Supreme Court held Monday, in a decision that bolsters the power of states relative to federal bank regulators.

The decision gives state attorneys general the ability to pursue in court banks that are alleged to have violated state laws such as those protecting consumers. Banking groups and their national regulator, the Office of the Comptroller of the Currency, argued that that power is restricted to the federal regulator.

The Supreme Court, in a 5-4 decision, disagreed. The case, Cuomo v. Clearing House Association, came about when New York Attorney General Eliot Spitzer, and his successor Andrew Cuomo, demanded that banks in the state disclose information about their lending patterns as part of an investigation into whether minorities were being steered into bad mortgages.

The banks argued that only their federal regulator had authority to demand that information.

The OCC’s rules, wrote Justice Antonin Scalia for the majority, “says that the State may not enforce its valid … laws against national banks. The bark remains, but the bite does not.”

Scalia, joining with the court’s four liberal justices, argued that state authorities must have the power to pursue cases against companies operating within their borders so long as there is no federal law explicitly prohibiting it and they do so through the court system.

The decision was supported by consumer groups, who argue that state officials have often been more eager to take action to protect consumers than have national regulators.

The decision could also give state officials more power in regulated industries other than financial services, such as pharmaceuticals and telecommunications.

Banking groups, meanwhile, argued that the decision will create a difficult situation in which national banks must deal with officials in 50 different states overseeing their actions, and that that will inhibit their ability to offer services.

National banks “will face a patchwork of duplicative and conflicting federal and state regulation and enforcement actions,” said Edward Yingling, chief executive of the American Bankers Association.

“This will make it difficult to serve consumers in today’s high-tech, mobile society where people and bank services move constantly across state lines.”