The U.S. Supreme Court handed the banking industry a defeat Monday, making it easier for the government to seize property used in a crime.
The justices, in a 5-to-4 decision, backed a Michigan law that allows prosecutors to seize houses and cars used by criminals, even if the owner didn't know about the crime in advance.
Banks, because they hold property titles until loans are paid off, may become the innocent owners in such cases. In urging the court to overturn the Michigan law, industry trade groups argued that banks could lose control of loan collateral.
The decision exposes the industry to huge losses if prosecutors seize property that is not paid off, said John J. Byrne, senior federal legislative counsel at the American Bankers Association.
"We are on the hook here for auto loans and property loans of any kind," he said. "What are lenders in Michigan to do starting today? How do you resolve this? It is a big problem."
Mr. Byrne said the ABA will bring its case to Congress, which is considering a bill that would require the government to prove that the owner knew the property would be used in a crime. That would protect lenders, he said.
"This means Congress, which has been fairly dormant, has to now pick up the ball on this and get moving," Mr. Byrne said.
The case was brought by a woman whose husband was caught having sex with a prostitute in their car. Michigan courts refused to return the car to the wife, saying it didn't matter if she was unaware of her husband's activities.