The harsh winds of speculation blew across the blogosphere this week about the dire possibilities unleashed by the decision last week of Nino and The Leftists to throw down some spike strips in the path of the OCC's speeding muscle car known as "national bank federal preemption." Yesterday's FinCri Advisor featured a jeremiad in which some experts warned that the Cuomo v. Clearing House Association decision "opened up the back door" to state attorneys general enforcing "safety and soundness" violations against national banks. I found that assertion to be untenable.
The ability now of states to prosecute national banks for consumer compliance violations means they also can go after issues of safety and soundness, says former OCC Chief Counsel Brian Smith, now a partner with Latham & Watkins in Washington, D.C.
"I don't see how one enforces a state law without implicating the actions of an institution, which is the reason for a bank examination. A bank examiner goes in, sees what a bank is doing and determines if it is safe and sound and complies with the law. Now the states can look at a practice and say, ‘That doesn't look legal. Here's a subpoena. Send us all your records.' Then the results of their enforcement actions are likely to have a material effect on the business practices of he bank, which ultimately is the safety and soundness of the bank itself."
First, the states cannot merely say "here's a subpoena." I made that clear a few days ago. The law enforcement officials will have to convince a judge that there exists probable cause that a violation of law has occurred in order to obtain a judicial subpoena. Administrative subpoenas are still not allowed. "Fishing expeditions" are specifically not intended to be permitted by any members of the SCOTUS, and the majority and dissenting opinions were clear on that point. Second, while it's true that a pattern of state law violations could very well constitute an "unsafe and unsound practice," that determination will be made, and enforced, against national banks strictly by the OCC (or its successor), not by a state attorney general or state court. Thus, much ado about about not much, at least at this point, in my opinion.
It made an attention-grabbing headline, though, didn't it?
The "back story" on all of this hoopla is that if you take attorneys general such "Spitz" Spitzer and "Deputy Sheriff" Barney Fife Andy Cuomo at face value and accept that there was a pattern or practice by some national banks of violating state fair lending laws, and that the OCC failed to do its duty to pursue examinations into such violations and to take enforcement action by reason of the same, then giving the state attorneys general the right to go after the banks directly through state judicial enforcement actions might conceivably result in eventually proving violations of the law and, as a result, forcing the OCC to act on the grounds that the banks were engaged in unsafe and unsound banking practices. However, if the OCC had been doing its job in the first place, then the banks will be subjected to no more liability than they should have been subjected to had the OCC vigorously enforced not only state law, but safety and soundness standards.
On the other hand, if, as many cynics have suggested, allegations of fair lending law violations were initially raised by Eliot Mess, and pursued by The Deputy, primarily to create a public relations event to further the political careers of the attorneys general involved, with no real hope of actually obtaining an eventual favorable judgment in court, but, at most, extracting a consent decree (in which the banks wouldn't admit wrongdoing) when the banks finally decided that they'd rather settle the bogus enforcement action than pay each of their defense counsels enough for a new mink stole for the wife and a Jaguar X-KE for each of the kids, then I don't see the SCOTUS ruling presenting undue "safety and soundness violation" risks to national banks. Either the banks broke the law or they didn't. Settling without an admission of liability (as many state actions are) does not necessarily mean that the OCC will determine that laws were broken or, even if they were, that the practice constituted a violation of safety and soundness standards. Again, it's the OCC, not the state, which decides "safety and soundness" violations by national banks.
Frankly, being pursued by a state attorney general who's being supervised by an independent judge and, perhaps, by a jury, in a court of law, with the rules of evidence applicable, and with the bank being presumed by law not to have violated the law, rather than having a federal bank regulator, with many fewer practical restraints on its power, with the deference traditionally shown by the courts to regulatory determinations of what's "unsafe and unsound" (other than in cases where "Nino Knows Best"), and with the ability to kill you softly over many months and years with a thousands cuts, having the ability to determine if you violated the law and, if so, what sanctions will be imposed, might work out better for the banks over the long haul. Even, and perhaps, especially, if they actually violated the law. OJ wouldn't have been acquitted if he was a national bank and the jury had been composed of OCC supervisory officials, regardless of the fact that "the glove didn't fit." Take my word for it.
There's no question that national banks are not in as good a position as they would be had Souter decided to just mess with everyone's head on his way out the door and vote with Thomas, or had Nino taken his Metamucil the night before oral arguments. Nevertheless, while hyperventilating about all the dire consequences that may flow from the decision might make great reading, it's grossly premature and, I suspect, grossly overblown at this point.







