WASHINGTON — In a rebuke of the Bush administration, the Supreme Court ruled Monday that a federal bank regulator erred in quashing efforts by New York state to combat the kind of predatory mortgage lending that triggered the nation's financial crisis.
The 5-4 ruling by the high court was unusual. Justice Antonin Scalia, arguably the most conservative jurist, wrote the majority's opinion and was joined by the court's four liberal judges.
The five justices held that contrary to what the Bush administration had argued, states can enforce their own laws on matters such as discrimination and predatory lending, even if that crosses into areas under federal regulation.
Justice Clarence Thomas, writing for the four dissenters, argued that laws dating back to the nation's founding prevent states from meddling in federal bank regulation. He was joined by Chief Justice John G. Roberts and justices Anthony Kennedy and Samuel Alito.
The ruling angered many in the financial sector, who fear it'll lead to a patchwork of state laws that'll make it harder for banks and other financial firms to take a national approach to the marketplace.
"We are worried about the effect that this ruling could have on the markets," said Rich Whiting, general counsel for the Financial Services Roundtable, a trade group representing the nation's 100 largest financial firms, in a statement. The decision "hinders the ability of financial services firms from conducting business in the United States. Even worse, it will cause confusion for consumers, especially those who move from state to state."
Stephen Ryan, a partner at McDermott Will & Emery, said the decision "will have a significant, negative impact on the ability of a national bank to offer a financial product uniformly throughout the country."
In a statement, Ryan, who's brought suits against state enforcement, predicted "a crazy quilt of conflicting legal instructions" and a "confusing situation of shared enforcement responsibilities for financial services."
Consumer advocates were elated.
"This Supreme Court decision is a victory for taxpayers, who have suffered enormously as a result of abusive business practices in all types of lending," said the Center for Responsible Lending, a consumer advocacy organization based in Durham, N.C. "This decision will help to restore confidence in the financial services industry and the national economy."
Congress has already been studying changes to pre-emption rules as part of President Barack Obama's proposed revamp of financial regulation. Obama proposes creation of a Consumer Financial Protection Agency, which would have the power to write and enforce rules on mortgage lending practices. The proposal expressly states that these rules would be a floor nationwide, and that states could write their own tougher rules.
At issue in Cuomo v. Clearing House Association is whether the Office of the Comptroller of the Currency, the chief regulator of national banks, erred in shutting down New York's efforts to question banks about predatory lending practices.
The OCC convinced lower courts that then-New York Attorney General Eliot Spitzer had overstepped into federal territory when he sought non-public information about the lending practices of federally regulated banks. Forty-nine states joined New York in appealing the lower court ruling.
While siding with the states, the Supreme Court ruling clarified that they can't issue their own subpoenas and instead must pursue enforcement action through courts.
"An attorney general acting as a civil litigant must file a lawsuit, survive a motion to dismiss, endure the rules of procedure and discovery, and risk sanctions if his claim is frivolous or his discovery tactics abusive," Scalia's opinion said. (Discovery is the pre-trial phase in which each party in a case can seek documents and other evidence from the other.)
The Bush administration argued that it had to the right to pre-empt any state effort to regulate. But after winning that argument, the OCC failed to address the issues of predatory lending that Spitzer, and later his successor Andrew Cuomo, sought to address.
Spitzer and Cuomo were concerned that white borrowers appeared routinely to be given lower interest rates than blacks and Hispanics. Their hunch was later proved correct, as poor underwriting standards and the explosion of adjustable-rate subprime mortgages — those given to borrowers with the weakest credit, most often minorities — combined to create record foreclosures.
Losses in mortgage finance morphed into a global credit crisis, bringing down venerable investment banks including Bear Stearns and Lehman Brothers and insurer American International Group. The rest is history.
"The Supreme Court has once again been required to act as a check against the former Bush administration's attempt to prohibit state law from protecting consumers. In holding that the OCC regulation at issue in Cuomo was invalid, the Court has reaffirmed the authority of the sovereign states to police corporate actors within a state, and protect their citizens," said Sen. Patrick Leahy, D-Vt., the chairman of the Judiciary Committee, in a statement. "And the Court has rightly rejected the national banks' attempt to hide behind an unreasonable agency regulation in order to escape scrutiny from state authorities."
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