Supreme Court Rules Against Banks: A Win for Consumer Protection

By Dirk van Dijk

In a surprising 5-4 vote, the Supreme Court ruled that national banks are still subject to the laws of the states they operate in. What made the ruling unusual is that Justice Scalia wrote the opinion and the other four conservative judges were in dissent (Roberts, Thomas, Alito and the normal swing vote Kennedy).

The ruling overturned an appeals court ruling that said that state attorneys general cannot investigate banks if they operate in more than one state.

The case in question involved the enforcement of fair lending laws in N.Y. State, specifically allegations that some banks were charging minorities higher interest rates. Instead, even though these are state laws, the appeals court had said that only the Office of the Comptroller of the Currency (OCC) had the power to investigate. In practice, this means that the laws were null and void, since the OCC has a lousy track record on such issues.

Enforcing state laws is simply not a priority for a division of the Treasury Department. While clearly there can be a problem if multiple agencies have jurisdiction in regulation, allowing things to slip through the cracks, there can also be problems when there is only one regulator and that regulator is in the pocket of the regulated. It is harder to capture all 50 state attorneys general and the OCC, than it is just the OCC alone. Make no mistake, the head of the OCC, John Dugan, a holdover from the last administration, is very much a creature of the big banks he is supposed to be overseeing. The OCC ranks just behind the OTS in being an ineffectual regulator during the bubble.

While the state attorneys general will not be able to issue subpoenas on their own authority (they need approval from a state judge), it does mean that they do not have to sit on their hands if they think the banks are breaking the law. It also will mean a more fair application of the law.

If the appeals court ruling had been allowed to stand, then the state attorneys general would have been free to go after a little community bank that only operated in their state, but unable to go after the big banks like J.P. Morgan (JPM), Bank of America (BAC), Citigroup (C) and Wells Fargo (WFC) that dominate the banking business. Sort of like telling them, yeah, it’s okay for the state to go after the street level drug traffickers, but not allowed to go after the kingpins.

This is a major win for consumer protection, and a loss for the banks. It is also a big win for states in the ongoing struggle between state and federal jurisdiction. I guess the Supreme Court is not as susceptible to campaign contribution influence as the Congress is.

Comments

[Carneades:]

This is an example of a scenario that regularly plays out in the Supreme Court. Perhaps, Mr. Cuomo was acting in the consumer's best interest when he proceeded to attack this specific financial institution under a NY State fair lending statute. However, the quandary reveals itself when you consider that this ruling essentially grants state attorneys general across the country the right to prosecute virtually any bank for anything. Banks happen to be unpopular right now (in case you haven't heard), providing AG's the political cover to engage in career-advancing prosecutions. This ruling could not only fundamentally change the office of State Attorney General, but also influence the sorts of candidates who begin to compete for these jobs.

Jun 30 10:23 AM

[doubleguns:]

States rights are probably going to be what gets us out of this political mess we are in.

This might also put the brakes on anymore too big to fail banks from emerging anytime soon. We can only hope. I would hope that this decision helps to reduce the size of our present to big to fail banks.

Jun 30 10:25 AM

[Graham and ...:]

Better that than a single regulator that can be "co-opted." Balance of power. To the states, and to the people. A few taxes are worth it.


On Jun 30 09:52 AM Angry Banker wrote:

> Conceptually this makes sense, but the downside is that multi-state
> banks will now have to implement 50 different localized compliance
> regimes, which will undoubtedly increase their costs of doing business.
> And you know who bears the burden of those costs, don't you?

Jun 30 10:52 AM

[swaps:]

It's too bad if banks have to implement 50 local compliance regimes. The banks have proven they are too big to manage anyway. As they downsize their balance sheets they will downsize operations. If they have good management they will retrench from markets where they are less profitable or poorly positioned.
But if a bank is managed by megalomaniac....

Jun 30 11:20 AM

[Mr. Ed, Jr.:]

Well, don't other businesses have to follow state laws ?

I do not see the wisdom in allowing any business which may be breaking the law to escape scrutiny by expanding.



On Jun 30 09:52 AM Angry Banker wrote:

> Conceptually this makes sense, but the downside is that multi-state
> banks will now have to implement 50 different localized compliance
> regimes, which will undoubtedly increase their costs of doing business.
> And you know who bears the burden of those costs, don't you?

Jun 30 12:32 PM

[User 357705:]

Even the most conservative of Justices is sick of theses banksters!

Jun 30 12:58 PM

[David Van K...:]

This is a big win for consumers and for (aspirational) transparency and honesty in the financial system. Banks large enough to do business in multiple states have the resources to figure out different regulatory regimes, just as multi-national corporations figure it out for different countries.

I haven't read the opinion yet, but I am glad Scalia wrote it. That's symbolically important. When you think about it, it would seem that the conservative view on this should be in favor of states' rights, which is what this opinion supports. Let's not forget that many of the most egregious Wall Street practices have come to light under pressure from investigations and prosecutions by the NY attorney general enforcing NY laws. In many cases, these were also matters that could have been, but were not, pursued by federal regulators.

Jun 30 03:14 PM

[Anandakos:]

Angry Banker,

I am so VERY willing to "bear the burden of those costs" if it wastes some -- or even lots -- of Dimon's, Kovacevich's, and Lewis' time. That would be time that they would otherwise spend squeezing yet more regional banks in pursuit of their complete oligopoly wet dream.

You go states Attorneys General!!!! (Yes, I know, it's a lame cheer, but heart warming one.)

Jun 30 03:53 PM

[conceptwizard:]

Have the banks really acknowledged their role in the demolition derby that wrecked the economy? Not really, even as Llloyd Blankfein of Goldman Sachs admits, "We know that we have an explicit contract with our shareholders to be responsible stewards of their capital . . . we regret that we participated in the market euphoria and failed to raise a responsible voice."

Ist that all they are copping to? A few weeks back. Goldman paid $60 million to Massachusetts to settle a complaint that they funded mortgages “designed to fail.” They admitted no wrong-doing, in a practice so common when Wall Street gets its fingers caught in the cookie jar of criminality.

Tell that to the millions losing their homes.

After helping to fund the subcrime market, Goldman was hailed as a visionary for turning against it. “it made $4bn profit from betting against the sub-prime mortgage market, and because - bar the fourth quarter of 2008 - it has continued to make a profit throughout.”

Let them pay for regulations and more regulations............

Jun 30 05:54 PM

[derryl:]

Strong states are critical to the balancing of powers in a federal republic. Otherwise oligarchs have free rein, and we have seen what they did to the oligopoly 'too big to fail' financial system. If a federation is a little less 'efficient' than an absolute democracy, all that means is that the oligarchs can less efficiently buy the country and rule it. I think this is an important SC decision that went the right way for a change.

Jun 30 08:43 PM

[SRF4REAL:]

Good on the court. Maybe now some important financial laws will be enforced by the states - the fed obviously is still sleeping off its roofie hangover after the party is over and doesn't want to admit who got screwed...

Jun 30 09:30 PM

[stark naked:]

So dont bank with them!


On Jun 30 09:52 AM Angry Banker wrote:

> Conceptually this makes sense, but the downside is that multi-state
> banks will now have to implement 50 different localized compliance
> regimes, which will undoubtedly increase their costs of doing business.
> And you know who bears the burden of those costs, don't you?

Jun 30 11:49 PM

[wgsalter:]

This changes very little. Banks always had to adhere to select state laws, and the Court's ruling continues to uphold the exclusivity of visitorial powers vested solely in the OCC. Cuomo is unable to use the executive powers awarded him by NY State Constitution (subpoena et al) and must rely on the processes of the state courts to enforce select types of state law. So the State can continue to enforce, but it cannot supervise.

Jul 01 08:18 AM

[lostark98:]

I think the other key point missed by Angry Banker is the fact that the current regulatory structure is rife with corruption and is ineffective. The states attorneys general have an obligation to protect the consumers and should be able to enforce state laws on firms operating in their states.

Jul 01 08:34 AM

[jmmx:]

No it does not - just comply with the most stringent consumer protections ad all will be fine. Hey - every local bank has to comply with its own state regulations, you telling me that JP Morgan cannot afford to do the same? Are you saying that they should have special treatment?

On Jun 30 09:52 AM Angry Banker wrote:

> Conceptually this makes sense, but the downside is that multi-state
> banks will now have to implement 50 different localized compliance
> regimes, which will undoubtedly increase their costs of doing business.
> And you know who bears the burden of those costs, don't you?

Jul 01 10:08 AM

[greyhack:]

Too bad, how many states will not allow the banks to practice usury through their credit cards.


On Jun 30 09:52 AM Angry Banker wrote:

> Conceptually this makes sense, but the downside is that multi-state
> banks will now have to implement 50 different localized compliance
> regimes, which will undoubtedly increase their costs of doing business.
> And you know who bears the burden of those costs, don't you?

Jul 01 10:12 AM

[Ouch$:]

It was great to see the Supreme Court is paying attention to large banks and the federal government. The problem still remains that some people can't afford the mortgages for a various number of good reasons. The reasons usually do not pertain their nationality, race or color.

Jul 01 12:06 PM

[Steve Ward:]

Apparently Justice Scalia still believes in State's Rights as a legal means to blunt the power of the Ferderal Government. Of course there is downside to it, like fairness in lending. Who'd a thunk of that.

Scalia is sending a signal to his other Justices, that signal being: With the Obama Administration grabbing for un precedented power, states rights are valid to protect the citizens from onerous power of the Feds.

States Rights have been much maligned the last 4 decades due to their mis-use as in regards to voting rights but they are still valid constitutionally and Scalia just proved it.
We are a Constitutional Federal Republic of individual States, we are not a Democracy. One conservative Justice understands that.

Jul 01 01:24 PM

[H. T. Love:]

Just my humble opinion, but the "increasing cost" argument has been used for decades to reduce regulation to the point that we now have the mess we are in.

- There are things more important than cost, like the welfare of the nation and its citizens, which consists of much more than just the lowest-possible-cost junk imported from abroad with lead paint on infant toys, etc.
- The constitution reserved to the states and the people all powers not granted specifically to the federal government, so the federal government has sway only in a few specific areas (and forget the commerce clause as a defense - it only regulates inter-state *trade*),
- No statement of the constitution *ever* advocated reducing cost for business, or anybody, as its goal and never stated an objective of making business life easier at the expense of state or citizen rights.

Balance in regulation, with omnibus consideration, is needed.

Why would anybody with concern for the foundations of this country have a problem with allowing the states to exercise their rights in governance of the activities of businesses that operate within their borders? For the same reason that they would object if they had to pay more for local labor rather than shipping jobs overseas - short-sighted focus on near-term gains?

For one, I'm glad that the court seems to see some merit in states rights, rather than just creating new law via judicial fiat, regardless of my feelings about a specific case.

My Hunble Opinion,
HardToLove


On Jun 30 09:52 AM Angry Banker wrote:

> Conceptually this makes sense, but the downside is that multi-state
> banks will now have to implement 50 different localized compliance
> regimes, which will undoubtedly increase their costs of doing business.
> And you know who bears the burden of those costs, don't you?

Jul 01 04:07 PM

[Moto:]

Everybody thinks its OK for them to go after the tobacco companies in the same manner so why not the banks?


On Jun 30 10:23 AM Carneades wrote:

> This is an example of a scenario that regularly plays out in the
> Supreme Court. Perhaps, Mr. Cuomo was acting in the consumer's best
> interest when he proceeded to attack this specific financial institution
> under a NY State fair lending statute. However, the quandary reveals
> itself when you consider that this ruling essentially grants state
> attorneys general across the country the right to prosecute virtually
> any bank for anything. Banks happen to be unpopular right now (in
> case you haven't heard), providing AG's the political cover to engage
> in career-advancing prosecutions. This ruling could not only fundamentally
> change the office of State Attorney General, but also influence the
> sorts of candidates who begin to compete for these jobs.

Jul 02 09:51 AM