Cuomo v. Clearing House: The Supreme Court Responds to the Subprime Financial Crisis and Delivers a Major Victory for the Dual Banking System and Consumer Protection

In Cuomo v. Clearing House Ass’n, L.L.C., the United States Supreme Court struck down a regulation issued by the Office of the Comptroller of the Currency (OCC), which barred state officials from filing lawsuits to enforce applicable state laws against national banks. In upholding the New York Attorney General’s authority to seek judicial enforcement of New York’s fair lending laws against national banks, Cuomo revealed a perspective on banking regulation that was significantly different from the Court’s approach only two years earlier in Watters v. Wachovia Bank, N.A. In Watters, the Court upheld another OCC regulation, which preempted the application of state laws to nonbank mortgage lending subsidiaries of national banks. Watters took a broad view of the preemptive reach of the National Bank Act and indicated that national banks would not benefit from supplemental regulation by the states. In Cuomo, however, the Court took great pains to limit the scope and precedential force of Watters. Three members of the Supreme Court (Justices Breyer, Ginsburg and Souter) switched from supporting the OCC in Watters to opposing the OCC in Cuomo. Evidently those Justices changed their views about the merits of the OCC’s preemptive regime and the value of state regulation between April 2007, when Watters was decided, and June 2009, when Cuomo was issued. The most plausible explanation for the three Justices’ change in perspective is that they were influenced by the outbreak of the subprime financial crisis in August 2007 and subsequent federal bailouts involving several major national banks. Amicus briefs filed in support of New York Attorney General Andrew Cuomo included numerous references to the financial crisis. In addition, the briefs sharply criticized the OCC for its sweeping preemption of state laws and for its weak record of protecting consumers from abusive lending practices. Statements made by Justice Ginsburg and Justice Souter during oral argument in Cuomo, and by Justice Stevens in his dissenting opinion in Watters, indicate that the Court was aware of the mortgage crisis and the growing controversy over the OCC’s preemptive actions. Cuomo represents a much-needed victory for consumers and for the principles of regulatory federalism inherent in the dual banking system. In addition, Cuomo supports current legislative proposals by the Obama administration, which seek to strengthen consumer protection and preserve the states’ longstanding role in regulating financial services. During the past decade, the states have been far more proactive than the OCC and other federal agencies in enacting laws and bringing enforcement proceedings to protect consumers against predatory lending and other abusive financial practices. The subprime financial crisis has demonstrated that effective consumer protection is closely linked to the safety and soundness of financial institutions. The states’ positive record of legislation and enforcement over the past decade demonstrates the wisdom of preserving a federalist system of financial regulation, which includes not only a federal component but also a supplemental state role in enacting and enforcing consumer protection laws. The only disappointing aspect of Cuomo for the states is that the Supreme Court failed to resolve a recurring issue about the appropriate level of judicial deference that federal agencies should receive when they claim authority to preempt state laws. Cuomo did not apply a four-part test for judicial review of agency preemption claims that was indicated by Justice Stevens’ opinion for the Court in Wyeth v. Levine. That test would strike an appropriate balance between (i) the expectation that administrative agencies should receive some deference based on their specialized expertise and (ii) the judiciary’s responsibility to ensure that preemption issues are resolved in accordance with the Constitution’s allocation of federal and state powers. Instead of following Wyeth, Cuomo left open the possibility that future preemption claims by federal agencies could receive a more accommodating level of judicial deference known as “Chevron deference.” However, the Court in Cuomo refused to defer to the OCC’s preemptive regulation, based on the Court’s conclusion that Congress did not delegate the preemptive authority asserted by the OCC. Cuomo may indicate that, even if the Supreme Court chooses to apply Chevron in future cases involving agency claims of preemptive authority, the Court will apply a heightened level of scrutiny in answering the question of whether Congress has actually delegated the preemptive power claimed by the agency.