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OCC Preemption at Supreme Court

posted by Bob Lawless

Here is one that sounds like a yawner but actually is not. The Supreme Court has on its docket a case called Watters v. Wachovia Bank, NA, in which the Court has been asked to decide, "Is interpretation of the Comptroller of the Currency that 12 C.F.R. 7.4006 preempts Michigan's laws regulating mortgage lending as applied to State chartered, nonbank, operating subsidiaries entitled to judicial deference under Chevron USA Inc. v. Natural Resources Defense Council, 467 U.S. 837 (1984)?"

Although the case may appear to present only a narrow question of federal banking law, Credit Slips readers may want to keep an eye on this one. It has not yet scheduled oral argument, but the Supreme Court's decision could have important effects on the ability of the states to enforce consumer protection laws related to credit and perhaps in other areas as well. Not unlike the Court's 1978 Marquette National Bank decision, which also involved a federalism issue under the National Bank Act leading to an effective deregulation of consumer interest rates, the Watters case could have vast unintended consequences.

How can the Watters case be so important? To understand that issue, one needs to understand a smidgen of federal banking regulation. The Office of the Comptroller of the Currency ("OCC") regulates national banks. In 2004, the OCC issued a regulation that preempted most all state consumer protection laws relating to the lending activities of national banks. Accompanying this regulation was another OCC regulation restricting the ability of state attorneys general to police the activities of national banks and, amazingly, the nonbank operating affiliates of national banks. For example, these regulations have been used by a national bank in Connecticut that had an affiliate selling prepaid gift cards. The bank, acting through its affiliate, claimed the OCC regulations prevented the state attorney general from applying a state deceptive practices law against the bank.

There are several lower-court cases where state regulators have challenged the OCC regulations, but the courts have rejected most of these challenges. Under principles of administrative law, courts are generally required to defer to administrative agencies when they offer interpretations of a statute within their regulatory expertise. This idea is known as Chevron deference for the United States Supreme Court case that announced it (and which is cited above). One might wonder why such deference should be given to an administrative agency regulation that nakedly expands the agency's power, but such finer points of administrative law are not our primary topic of concern on Credit Slips. Rather, for administrative law junkies, a detailed exploration of the legal issues surrounding Chevron deference as it relates to the OCC regulations, courtesy of Professor Arthur Wilmarth at George Washington University, appears here.

I have been wondering about the practical implications of  the Watters case for those of us interested in consumer credit policy. There is a good chance the Supreme Court may strike down or cut back on the regulations. The lower courts had been fairly consistent in upholding the regulations. The Supreme Court often reaches out for cases where the lower courts are in conflict, but that was not the situation here. The granting of cert may be a signal that some justices were concerned about the OCC's brazen disregard for principles of federalism.

The OCC's proper sphere of concern is the safety and soundness of the national bank system. It strains credulity to think that complying with state consumer protection laws constitutes an undue burden on national banks. I suppose national banks could be more profitable if they could ignore consumer laws in the same way that manufacturers could be more profitable if they were allowed to ignore environmental laws. Surely, no one contends that the proper role of the OCC is to maximize bank profits at the expense of other regulatory and policy goals. When the OCC announced its preemptive regulations, my reaction was that they should just make clear they were doing so because they were in the pocket of the national banks rather than insult the public's collective intelligence that the soundness of the national banking system was at stake.

If the Supreme Court strikes down the OCC's regulations, that would force the national banks to go to Congress where they are far less likely to receive a sympathetic ear. On the other hand, if the Supreme Court upholds the OCC's actions, I worry it could lead to many more regulations preemptive of state consumer laws and not just in the area of consumer credit. There are numerous federal statutes giving some federal agency some say about the scope of consumer protection. Consider also that after the mid-term elections we may see a more regulatory-minded legislative branch pitted against an antiregulatory-minded executive branch. If the Bush Administration finds its stymied, a Supreme Court decision in favor of the OCC could embolden the Bush Administration's use of preemptive regulations to further its policy goals.


I signed an amicus brief in this case because I feel strongly about the importance of state governments as consumer protection regulators. The brief was drafted by Kathleen Keest of the Center for Responsible Lending and was joined by AARP, the Consumer Federation of America and several other law professors. The brief is available on Westlaw or Lexis. Patricia McCoy (University of Connecticut Law School) organized the scholarly community to sign onto the brief, and she is an upcoming guest blogger in December at Credit Slips. I'm looking forward to reading her latest thoughts on the Watters case, and I hope you will too.

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