The Supreme Court paved the way on Monday for states to enforce fair-lending laws and other consumer protection measures against the nation’s biggest banks, striking down a rule that limited such powers to federal banking regulators.
The court concluded that rules issued by federal banking regulators under the National Bank Act — a law passed in 1864 — could not block, or pre-empt, efforts by the states to enforce their laws.
The case began with letters sent in 2005 by the New York attorney general at the time, Eliot Spitzer, to several national banks, including Citigroup, JPMorgan Chase and Wells Fargo, inquiring about their lending practices to minority customers.
The letters referred to “troubling” disparities that suggested black and Hispanic borrowers had been charged disproportionately higher interest rates on mortgages compared with those for whites.
The letters asked for the information “in lieu of subpoena” but strongly suggested that subpoenas might follow if the requests were not fulfilled.
A banking trade group and the Office of the Comptroller of the Currency brought suit to block Mr. Spitzer’s request, contending that the National Bank Act and rules issued by the Bush administration in 2004 gave that kind of law enforcement authority to the comptroller and prohibited such efforts by the states. A federal district court ruled against the states, and the United States Court of Appeals for the Second Circuit affirmed the lower court’s decision.
Writing for a 5-to-4 majority, Justice Antonin Scalia concluded that the attorney general had not been engaged in the broad “visitorial powers” reserved by the federal government, in which the government acts like a supervisor with free access to bank records on demand. The court, he wrote, has always understood that visitorial powers are “quite separate” from the power to enforce the law, and the attorney general was acting in the role of “sovereign-as-law-enforcer” in seeking the information.
Normally, Justice Scalia wrote, the court would defer to an agency’s interpretation of the law when the terms in dispute are ambiguous. But in this case, which turned on such terms as “visitorial powers,” he stated that even though the term was “somewhat ambiguous,” the court could discern “the outer limits” of the term, “even through the clouded lens of history.” The meaning that could be wrestled from the phrase, Justice Scalia wrote, did not include restrictions on “ordinary enforcement of the law” by the states.
The decision brought together an unusual coalition. Justice Scalia, one of the court’s most conservative members, was joined by the court’s more liberal wing of John Paul Stevens, David H. Souter, Ruth Bader Ginsburg and Stephen G. Breyer.
A decision concurring in part and dissenting in part was written by Justice Clarence Thomas and was joined by Chief Justice John G. Roberts Jr. and Justices Anthony M. Kennedy and Samuel A. Alito Jr., a group that did not share Justice Scalia’s view through the clouded lens of history. “The statutory term ‘visitorial powers’ is susceptible to more than one meaning,” Justice Thomas wrote, “and the agency’s construction is reasonable” and thus should be deferred to.
In a statement, New York’s current attorney general, Andrew M. Cuomo, called the decision “a huge win for consumers across the nation.” In a reference to the nation’s economic crisis, Mr. Cuomo added, “the court has recognized that fair lending and consumer protection — the cornerstones of a sound economy — require the cooperative efforts of both the states and the federal government.”
Seth Galanter, a lawyer in Washington who wrote a brief on behalf of former comptrollers, said that the worst case envisioned by federal regulators had not come to pass. While the decision does not block the attorneys general from enforcing state laws, he said, it does require judicial approval to gain access to records. “Our concern was really the establishment of 50 state supervisory regimes, where states could come in and look at the books whenever they wanted to,” he said.
The federal regulators had argued that their informal approach worked quietly with banks to address issues like fair lending in a “prophylactic way” that protected consumers.
John F. Cooney, a lawyer in Washington who specializes in bank regulation and a former deputy general counsel for litigation and regulatory affairs at the Office of Management and Budget, said that the decision upholds the theme of federalism that has run through several important cases of this just-ended Supreme Court term.
He added, however, that the banking decision would now require action by the legislative branch. “People are going to go to Congress and say, ‘You need to give us a functioning principle’ to define the boundaries of state and federal law,” he said. “The ultimate court of appeal will be Congress.”
James E. Tierney, director of the national state attorneys general program at Columbia Law School, said that a line-drawing exercise by Congress was unlikely to put state enforcers on the sidelines again.
In the absence of tough regulation of the banking industry by the federal government, he said, state attorneys general have stepped up to provide consumer protection and to fight discrimination. He called the case “a stinging defeat for the large banks and federal regulators who have worked for years to stop states from enforcing state consumer protection and antidiscrimination laws.”
Senator Patrick J. Leahy, Democrat of Vermont, agreed, calling the decision “a check against the former Bush administration’s attempt to prohibit state law from protecting consumers.”