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April 28, 2009

Justices to Hear Arguments on Bank Regulation

New York Times, 4/28/2009
Reported By: John Schwartz
WASHINGTON — The Supreme Court will hear arguments on Tuesday in a case that could change the way big banks are regulated.
In the case, Cuomo v. The Clearing House Association, federal and state regulators have squared off over which part of the government should serve as the nation’s watchdog for national banks. The case began four years ago, when Eliot Spitzer, New York’s attorney general at the time, questioned why some national banks seemed to be making a disproportionate number of high-interest home mortgage loans to black and Hispanic borrowers.
Former NY Governor's Mistress

Mr. Spitzer was attempting to enforce New York’s anti-discrimination laws, but he ran up against federal precedent that tended to leave regulation of national banks to the Treasury Department, and, specifically, the Office of the Comptroller of the Currency. A consortium of banks sued Mr. Spitzer, and so did the Office of the Comptroller of the Currency.

The banks and federal regulators argued that letting state officials regulate the banks would force the financial institutions to deal with a national patchwork of conflicting regulations. A federal district judge in 2005 and the United States Court of Appeals for the Second Circuit in 2007 ruled against New York and for federal regulation.

The fight involves fundamental issues of federalism and consumer protection, and the court’s decision could open new powers of regulation to the states.

Much has changed since Mr. Spitzer began his inquiry. For one thing, he is no longer attorney general; Andrew M. Cuomo has succeeded him. And, at the same time, the nation has been shaken by financial scandal and failure in ways that have led many to question the sagacity and effectiveness of the regulatory structure. A brief filed by the 49 other state attorneys general argues, “The recent (and continuing) fallout from the subprime lending debacle demonstrates the need for more oversight and consumer protection enforcement in the area of mortgage lending.“

The Office of the Comptroller of the Currency, the brief states, “has no experience in enforcing state public protection laws, has a minimal track record in consumer protection, and has no accountability to the citizens of any State,” and its attempt to have exclusive regulatory authority over national banks was part of “a pre-emption agenda” in recent years to take “a wrecking ball” to pro-consumer regulatory efforts.

James E. Tierney, director of the national state attorney general program at Columbia University law school, said the federal regulators’ job is to promote “bank fiscal soundness and not protection of consumers,” and that battling fraud in mortgage lending is something that the state attorneys general have long excelled at. “They got it first,” Mr. Tierney said, “and they got it right.”

A brief filed by all previous Comptrollers of the Currency since 1973, however, takes a different view. The comptroller’s office, according to the brief, works quietly with banks to address consumer issues in a “prophylactic” way, and “uses the wide range of its supervisory powers in an effort to alert national banks of potential non-compliance that poses risks to consumers and to ensure that they are addressed as early as possible.”

The threat of action by the federal regulators, the comptrollers stated, is “a significant incentive for national banks to address any compliance issues before they become serious problems.” And when such gentle measures fail, the comptrollers wrote, the agency “does not hesitate to take aggressive enforcement action against national banks.” The role of the states, they argued, is to pass along information about “possible problems,” leaving enforcement to the federal regulators.

The justices will also hear a case on Tuesday, Forest Grove School District v. T.A., that deals with the question of whether parents can receive reimbursement for private school tuition if their children have never received special education services.

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