Consumer advocates and state regulators have welcomed the Supreme Court's Cuomo decision because it presages significant growth of state power to protect consumers and regulate federally chartered institutions. They have also read the decision as signaling a policy change that supports federal legislative proposals to divest federal banking statutes of preemptive authority over state consumer protection laws. The former claim perhaps protests too much, and the latter proposal would redress a recent imbalance by breaking the scales. Absent such a legislative detonation, Cuomo does mean more work for banking lawyers and their clients, parsing out those very few pieces of comprehensive OCC preemption regulations that a court might find "unreasonable."
Cuomo stands for the proposition that a state attorney general has as much power as a common citizen who, empowered by state consumer protection law that regulates an issue that is not substantively preempted, can file a lawsuit and use civil discovery. The attorney general cannot command production of documents from a federal bank without judicial help and supervision (something an AG can do to other organizations with a "civil investigative demand"). The attorney general must conform to the court's rulings on privilege, examination report confidentiality and a host of other issues, just like a private litigant.
Nor does the Supreme Court's reasoning in the case undermine the important principles of preemption jurisprudence. The court did not accept the states' invitation to throw out the Chevron deference rule when faced with a regulator's interpretation of the scope of preemption. Rather, federal bureaucrats who tell states the limits of state power are still entitled to substantial deference unless the regulator's opinion is "unreasonable."
The case may, however, have more of an impact if it is perceived as a policy impetus for recently proposed federal legislation that could further hobble our national financial services economy. On June 30, the Treasury delivered to Capitol Hill the "consumer protection" part of financial regulatory reform. The Obama administration's proposal for a new Consumer Financial Protection Act includes provisions that would eliminate all preemptive effect of the National Bank Act and the Homeowner's Loan Act as applied to any state consumer protection laws, including usury and unfair-practices rules. This approach seeks to redress the imbalance of state and federal power that arguably facilitated many of the excesses that led to the financial meltdown. But this rebalancing breaks the scales. Marketing, originating, documenting, closing and servicing a financial service product under 50 different sets of pricing, conduct and disclosure rules is so inefficient as to border on impossible. That is why Congress preempted all state laws when it delivers federal student loans. That is why targeted federal preemption is a critical piece of the nation's private financial marketplace.
Using federal preemption to promote uniform national commerce is not the recent progeny of aggressive regulators or judicial abstractionists. For example, in 1864, Congress gave national banks the power to charge interest at the highest rate allowed in their home states, regardless of the location of the borrower. In 1980, Congress saw that credit card issuers would all become national banks under this rule, and gave the same power to any FDIC-insured bank, thereby preserving a dual banking system. A few months later, Congress responded to disintermediation in mortgage lending and enacted legislation that preempted all state usury laws as applied to mortgages, wiped out limits on due-on-sale clauses and leveled the state playing fields for adjustable-rate mortgages. All of these laws are unaffected by Cuomo, but the administration's proposals would wipe the slate of many.
Thus Cuomo's holding has modest effect compared to pending legislative change, but it is nevertheless significant in the future uncertainty it will create. Cuomo is the first instance of judicial rejection of the OCC's preemption hat trick of 2004. In January of 2004, the OCC issued a set of sweeping new preemption regulations that covered everything from long-standing rules allowing national banks to underwrite mortgages without regard to state loan-to-value rules to preemption of state judicial enforcement of state laws. Because much of the content of the OCC's 2004 regulations simply repeated the statutes, prior case law and prior regulations, over time its sweeping recodification of that law has become an accepted guide for national banks in operating national delivery systems. As the Court has now made clear, parts of the OCC's broad vision were "unreasonable." The comprehensive work of the OCC in 2004 must now be parsed piece by piece against its underlying legal authority. That is good banking for lawyers, but may not be good for the economy or the consumer. It is a small inconvenience, however, compared to legislative proposals that would moot the entire exercise.
