In theory, Monday’s Supreme Court decision to bar state oversight of subsidiaries of federally chartered banks was simply a confirmation of the Office of the Comptroller of the Currency’s efforts to assert (and some would say extend) its authority, but the effect is to end the dual structure which permitted both federal and state regulation of federally-chartered banks. However, it also puts the nail in the coffin of consumer protection in the banking industry, ending the effect of predatory lending laws in 37 states, unless Congress picks up the mantle (which is possible). In fairness, the Comptroller of the Currency was more aggressive in enforcing the consumer protection provisions of Homeowners Equity Protection Act than was the Fed (and the OCC, unlike the Fed, has consumer protection as one of its goals).
We have advocated stronger borrower protection. In the days when dinosaurs walked the earth, lenders were prudent, and bank products were straightforward, such protection was not required. A simple usury law would prevent most abuses. Lenders had no reason to extend credit to someone who had reasonable odds of not paying. But lending practices have become more oriented towards efficiency than safety, and lenders too often see themselves more as originators than the party taking credit risk. And product complexity makes it too easy for creditors to fool borrowers, and for borrowers to fool themselves.
In some regards, this decision was not unexpected. The Supreme Court has been gutting state authority over banking for some time. A 1978 decision, Marquette versus First Omaha Services Corp., permitted banks to charge the highest rate permitted in its home state to customers anywhere in the country. That decision effectively gutted state usury laws. Although it was initially difficult for banks to set up charters in high-rate states, as banking regulations eased in the 1980s, banks went jurisdiction-shopping and states negotiated deals, including their interest rate regimes, to attract banking operations. So we have the Supreme Court to thank for the fact that credit card interest rates are no longer capped at 19.8%.
As an aside, I am relieved that the EPA has not similarly attempted to override state environmental protection laws (perversely, the Bush Administration desire to neuter the EPA may have had the effect of curtailing its normal bureaucratic impulses to secure its turf). Measures like California’s plan to cut carbon emissions 25% by 2020 and Washington state’s ban on PBDEs (industrial chemicals used as flame retardants in computers and furniture; a prohibition here would have national impact) would be impossible if environmental regulations were treated in the same fashion as banking (of course, unlike banks, industrial companies are not subject to specific licensing, regulation, and oversight, but nevertheless, one can see that having multiple regulators yields benefits as well as costs).
From the Wall Street Journal, “High Court Blocks State Power Over Some Lenders”:
The Supreme Court blocked state oversight of a large swath of the mortgage-lending market, ruling state regulators have no authority over the business conducted by the subsidiaries of national banks.
The 5-3 ruling marks a definitive turn in the U.S.’s “dual” banking system, in which banks can operate under either a state charter or one issued by the federal Office of the Comptroller of the Currency in Washington. State regulators and the federal comptroller compete to win charters from banks, which bring with them fees that pay for their budgets.
Critics have argued the federal comptroller, traditionally oriented toward serving the banking industry, has fallen short in protecting consumers.
The ruling effectively ends state efforts to fight predatory lending or impose other consumer protections on national banks in whatever guise the banks take. But it also raises the likelihood Congress will step in with legislation directing the federal comptroller to take additional steps to protect consumers.
The comptroller has “succeeded in reducing and eliminating a lot of state consumer laws without putting anything in their place,” said Rep. Barney Frank (D., Mass.), the chairman of the House Financial Services Committee. “It means we have to act.”
John Ryan, executive vice president of the Conference of State Bank Supervisors, said the decision “stops the evolution of consumer protections at the state level.” He said, “Thirty-seven states have passed predatory lending laws, and this pre-empts those laws for national banks and their subsidiaries.”
Comptroller of the Currency John Dugan said fears of lax oversight were a “red herring.” Only about 10% of subprime loans made last year were issued by national banks, he said. (Read related article.)
“We’ve gone to a more national market for products like mortgages,” he said, and “it is difficult for institutions that operate on a national basis to have all sorts of different standards operating in different states.”….
Both state and federal regulators maintain they strictly supervise banking activities. But a selling point for the national charter has been the federal power to set aside state regulation — including consumer protection laws — that banks could find burdensome.
Yesterday’s case originated in Michigan, where Wachovia Mortgage Corp., owned by the holding company Wachovia Corp., of Charlotte, N.C., operated under supervision from the state commissioner of insurance and financial services. In 2003, Wachovia restructured itself to make Wachovia Mortgage a direct subsidiary of Wachovia Bank, rather than of the holding company, and declared it was no longer subject to state regulation.
The state commissioner told Wachovia Mortgage it could no longer do business in Michigan, and the bank sued, prevailing before the Sixth U.S. Circuit Court of Appeals in Cincinnati.
Michigan, on appeal to the Supreme Court, raised an argument seemingly aimed at the court’s newly buttressed conservative wing, contending that the comptroller’s actions infringed on the 10th Amendment, which reserves unspecified powers to the states. But Chief Justice John Roberts and Justice Alito, the court’s two new conservatives, split on the issue. Chief Justice Roberts joined Justice Antonin Scalia in a dissent written by Justice John Paul Stevens, who himself split from other liberals on the court.
The dissenters argued that the majority gave the comptroller far more authority to set aside state laws than Congress had contemplated, threatening the viability of the dual banking system.