Banking Law

Preemption: High Tide?

When we discussed the US Second Circuit Court of Appeal's decision in December 2007 to uphold the principle federal preemption of the authority of state regulatory authorities to enforce state laws on fair lending against national banks, it generated a big yawn from us, because the decision was expected. On the other hand, we didn't  think that Eliot Spitzer would give up, and expected him to appeal to the US Supreme Court. He did (or at least his successor Andrew Cuomo did, inasmuch as Eliot Mess left office under a cloud of ignominy). On Friday of last week, the SCOTUS granted certiorari and will hear the case in its next term. Expedited briefing means that oral arguments might be heard as early as April.

At this point, I expect the SCOTUS to uphold the Second Circuit's ruling. The same broad preemption principles that were upheld in Watters v. Wachovia would seem to support the reasoning of the Second Circuit (and the district court) in Cuomo v. Clearing House Corporation. Nevertheless, with the change in administration (one not likely to be as forceful in its support for preemption in all areas as was the Bush administration), you have to wonder how strenuous the arguments will be when briefs are filed in March. Given the nature of the laws at issue in this case, you also have to wonder  if some of the preemption-supporting justices who formed the majority in Watters v. Wachovia (Alito?) might change their minds as to the reach of federal preemption. Justice Thomas recused himself in Watters v. Wachovia, but should be able to vote with his brothers Scalia and Roberts against pre-emption in this one.

Even should the OCC prevail as expected, there exists the risk that a ruling to uphold the Second Circuit might be the high tide of SCOTUS preemption rulings for national banks. With a new sheriff in the White House, with the Democrats in control of the House and Senate (although control in the Senate is not  filibuster-proof), and with preemption-hating Democratic leadership in Congress influencing the public debate, I can clearly see a scenario where Barney and the Boyz lead a charge for federal legislation that shortens the reach of national preemption as it applies to certain types of state laws such as those that are the subject of this action. I see much conflation in the public mind of predatory lending, subprime lending, discriminatory lending, unregulated and regulated lenders, banks and non-banks, into one big mess of "kill them all and let God sort the guilty from the innocent." When Joe and Jane Sixpack (and their elected representatives) are looking for scapegoats, national banks will do just fine.

As I said in October 2005, I think the states will continue to lose on these issues "unless Congress changes the law." At this point, it's merely a gut feeling and nothing more, but if there ever is a time that might be ripe for such a change, this year (or next, perhaps) might be that time. Regulatory reform legislation is coming to the banking industry, and the clipping of the wings of federal preemption might be part of that package.

Full post as published by Bank Lawyers Blog on January 19, 2009 (boomark / email).