By Greg Stohr
March 26 (Bloomberg) -- The Obama administration’s call for greater financial regulation may have its limits.
The administration late yesterday urged the U.S. Supreme Court to bar New York and other states from enforcing their fair-lending and other consumer-protection laws against federally chartered banks including JPMorgan Chase & Co. <http://www.bloomberg.com/apps/quote?ticker=JPM%3AUS> and Wells Fargo & Co. <http://www.bloomberg.com/apps/quote?ticker=WFC%3AUS>
The legal brief, which adopts the Bush administration’s position, is a setback for consumer and civil-rights groups that had urged President Barack Obama<http://search.bloomberg.com/search?q=Barack+Obama&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1>’s team to switch positions. The filing puts the administration at odds with New York Attorney General Andrew Cuomo<http://search.bloomberg.com/search?q=Andrew+Cuomo&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1>over the respective roles of state and federal regulators. The high court will hear arguments April 28.
“National banks are created by the government to serve federal purposes,” argued Solicitor General Elena Kagan<http://search.bloomberg.com/search?q=Elena+Kagan&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1>, the Obama administration’s top courtroom lawyer. “Oversight of the banks is therefore principally entrusted to the United States.”
The court filing coincides with this week’s proposal by the administration to put large hedge funds, private-equity firms and derivatives under federal supervision for the first time.
Reviving Investigation
Cuomo is seeking to revive an investigation, begun by predecessor Eliot Spitzer<http://search.bloomberg.com/search?q=Eliot+Spitzer&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1>, into the real-estate lending practices of units of JPMorgan, Wells Fargo and HSBC Holdings Plc <http://www.bloomberg.com/apps/quote?ticker=HSBA%3ALN>. A lower court barred the probe, saying a regulation issued by the U.S. Comptroller of the Currency <http://www.occ.treas.gov/> blocks state scrutiny of national banks.
The case will determine whether federal regulators have exclusive governmental authority to press fair-lending and other types of complaints against national banks. More broadly, the case will shape how much ability agencies have to shield companies from state-level scrutiny.
Kagan filed the brief on behalf of the OCC, an independent Treasury Department bureau still being run by Republican appointee John Dugan<http://search.bloomberg.com/search?q=John+Dugan&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1>, whose term expires in 2010. Obama has decided to retain Dugan, two people familiar with the decision said last month.
“We’re disappointed to see it,” said Gail Hillebrand<http://search.bloomberg.com/search?q=Gail+Hillebrand&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1>, a San Francisco-based Consumers Union <http://www.consumersunion.org/>attorney who had sent a letter urging the administration to switch sides in the case. “We hope they just haven’t gotten around to getting rid of those regulations. It’s certainly a missed opportunity.”
Administration Constraints
Consumer advocates said Dugan’s control of the OCC may have constrained the new administration in its handling of the case, particularly given that Kagan was sworn in less than a week ago.
“If the OCC was unwilling to change their position, then the Justice Department had relatively few options,” said Eric Halperin<http://search.bloomberg.com/search?q=Eric%0AHalperin&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1>, a lawyer with the Center for Responsible Lending<http://www.responsiblelending.org/>, a Washington consumer advocacy group that supports Cuomo in the case. “We would hope that in the future the OCC shows as much concern about consumer protection as they do about protecting their turf.”
The case bears some resemblance to a dispute resolved by the Supreme Court in 2007 in favor of the banking industry. The court ruled 5-3 that states can’t regulate the mortgage-lending subsidiaries of banks supervised by the OCC.
While the 2007 case involved traditional banking regulation, including licensing and so-called visitorial powers, the latest fight concerns more general state rules, such as antidiscrimination and consumer-protection laws.
Federal-State Balance
By blocking those laws, the OCC regulation “drastically alters the federal-state balance,” Cuomo argued in a court filing earlier this month.
The Obama administration contends that federal regulators can adequately ensure that national banks comply with both state and federal laws. The administration said last night that the OCC “vigorously enforces fair-lending laws against national banks.”
Civil rights groups dispute that. In a letter this month to Treasury Secretary Timothy Geithner<http://search.bloomberg.com/search?q=Timothy+Geithner&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1>and Attorney General Eric Holder<http://search.bloomberg.com/search?q=Eric%0AHolder&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1>, groups led by the Leadership Conference on Civil Rights<http://www.civilrights.org/>said the OCC had filed no enforcement actions based on state antidiscrimination laws since the OCC adopted the disputed regulation in 2004.
“It is painfully clear that federal regulators did little to fill the void,” the letter said.
The Supreme Court case stems from Spitzer’s probe into whether lenders charged higher mortgage interest rates<http://www.bloomberg.com/apps/quote?ticker=ILM3NAVG%3AIND>to minorities. Spitzer began his investigation after 2004 data released under the Home Mortgage Disclosure Act showed black and Hispanic customers in New York were more likely to receive high- priced loans.
Spitzer’s Probe
OCC and the Clearing House Association<http://www.theclearinghouse.org/about/association/000223f.php>, which represents commercial banks, sued in 2005 to block Spitzer’s probe. The Clearing House’s members include JPMorgan, Wells Fargo and HSBC.
In a court filing, the Clearing House Association’s attorney, Seth Waxman<http://search.bloomberg.com/search?q=Seth+Waxman&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1>, argued that the OCC regulation is a reasonable interpretation of the National Bank Act.
That law “broadly precludes state investigations or enforcement actions that relate to a national bank’s exercise of its authorized banking powers,” Waxman argued.
The case is Cuomo v. Clearing House Association, 08-453.