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Court Opens the Door For Predatory Lawsuits

WASHINGTON-The Supreme Court ruled that the Comptroller of the Currency went too far in trying to block the states from investigating possible discriminatory lending practices at national banks.

In a 5-4 ruling, the high court ruled that New York attorney general Andrew Cuomo can sue national banks as a civil litigant to enforce state consumer protection laws.

"The comptroller's regulation purporting to pre-empt state law enforcement is not a reasonable interpretation of the National Banking Act," according to the decision in Cuomo v. Clearing House Association. The decision opens the door for AG Cuomo to file lawsuits against the four national banks represented by the Clearing House. The four banks are Citigroup, Bank of America, JPMorgan Chase and Wells Fargo.

However, the justices ruled that state law enforcement officials cannot subpoena national banks or engage in "fishing expeditions" on their own.

"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," according to the opinion written by Justice Antonin Scalia.

Conference of State Bank Supervisors general counsel Buz Gorman noted the justices limited the ability of the attorneys general to gather information to bring a lawsuit.

"It is still a win for the states because they are allowed to enforce the law. But it not a disaster for the OCC," Mr. Gorman said.

The Cuomo v. Clearing House Association decision marks a break with a long line of Supreme Court decisions that backed the Office of the Comptroller of the Currency's authority to block the states from interfering with the operations of national banks.

Comptroller John Dugan said he is "disappointed" the court disagreed with the OCC's interpretation of its powers. But he pledged to improve the OCC's cooperation with the states.

"I want to stress that the OCC is absolutely committed to strong oversight and enforcement of fair lending laws, and that the OCC and the states share a common goal of ensuring fair access to financial services and fair treatment of consumers and businesses by all financial firms," Mr. Dugan said.

The case started in 2005 when former New York AG Eliot Spitzer asked the four national banks for information about the lending activities in minority communities. Comptroller John Dugan advised the banks not to comply.

At the request of the Clearing House, a U.S. District Court enjoined the attorney general from seeking the information. The 2nd Circuit Court of Appeals affirmed the injunction and upheld OCC regulation that shields national banks from state enforcement activities.

The Supreme Court decision changes the playing field. It is going to make it tough for national banks to simply refuse requests for information from state AGs, according to Steven Kaplan, a partner at K&L Gates.

"It makes it more difficult for a bank to just say 'no' to an AG. The consequences may be a lawsuit," he said.

John Cooney, an appellate litigator at Venable LLP, said the limitation on subpoenaing banks will slow down the process and reduce the number of cases AGs pursue.

"It is more expensive to have subpoenaed everyone else and put a case together without the documents of the institution involved," Mr. Cooney said.

However, "attorneys general have other weapons in their arsenal," he said. There are other forms of legal negotiations before a complaint is filed in court that could persuade a bank to provide information, Mr. Cooney said.

Meanwhile, the American Bankers Association and Financial Services Roundtable are concerned the Cuomo decision will destroy the efficiencies of the national banking charter.

"Without a uniform regulation and enforcement of the laws that apply to national banks - which often includes state laws - those institutions will face a patchwork of duplicative and conflicting federal and state regulation and enforcement actions," ABA president and chief executive Edward Yingling said.

But it will be difficult for the banking industry to get relief in Congress, which is considering the Obama administration's regulatory reform proposal that would allow state attorney generals to enforce federal banking laws. In addition, the Obama proposal calls for the creation of a new Consumer Financial Protection Agency that would set federal standards for mortgage lending, but allow the states to enact tougher standards.

The Financial Services Roundtable's Housing Policy Conference and ABA are opposed to the consumer agency, which would have broad enforcement authority over all mortgage lenders - including national banks and federally chartered thrifts.

"This would further create a patchwork of 50 state regimes, which will stifle innovation and increase confusion to the consumer," roundtable president and CEO Steve Bartlett said.