Supreme Court ruling permits states to enforce consumer protection laws against national banks

In a departure from previous rulings, the U.S. Supreme Court recently ruled in Cuomo v. Clearing House Association that individual states may sue national banks to enforce state consumer protection laws.

The ruling, which rejected the position of the Office of the Comptroller of Currency that states were prohibited from initiating litigation to enforce their state laws against national banks, may now expose national banks to claims for violations of the different consumer protection statutes of the various states.

In other words, the decision provides New Hampshire and other states with the authority to enforce their consumer protection laws against national banks.

In 2005, Eliot Spitzer, then-attorney general of New York state, requested certain national banks to informally provide non-public information about their consumer lending practices. Spitzer’s letter requests, made in lieu of subpoenas, were intended to discover information about the banks’ lending practices to minority customers to determine whether any of the banks had violated New York’s fair lending laws.

The requests also suggested that failure to provide the requested information voluntarily would lead to the issuance of formal subpoenas.

The Office of the Comptroller of the Currency, or OCC, and the Clearing House Association LLC, a banking trade group, brought suit in federal court to enjoin Spitzer’s requests, based on the National Bank Act and regulations promulgated by the OCC in 2004 prohibiting enforcement efforts against national banks by the states.

In 2005, the U.S. District Court ruled in favor of the OCC and Clearing House, and the U.S. Court of Appeals for the Second Circuit affirmed the injunction in 2007.

But in a 5-4 decision, the Supreme Court vacated the injunction obtained by the OCC and Clearing House to the extent it prohibited the attorney general from bringing judicial enforcement actions against national banks to enforce state law, but affirmed the injunction against the threatened issuance of executive subpoenas.

In an unusual alliance, Justice Scalia, joined by Justices Stevens, Souter, Ginsburg and Breyer, authored the majority opinion.

Engaging in an analysis of the legislative history of the National Bank Act, the court concluded that states are not precluded from pursuing the “ordinary enforcement” of their laws through litigation.

The court concluded that when a state attorney general brings suit to enforce state law against a national bank he or she is acting as a law enforcer.

Noting that the National Bank Act allowed states to enact some substantive laws affecting banks, the court rejected the OCC regulation to the extent that it would preclude the states from enforcing their own otherwise valid laws. The court separately rejected the OCC’s interpretation of its regulation, finding that it “attempts to do what Congress declined to do: exempt national banks from all state banking laws, or at least state enforcement of those laws.”

At the same time, however, the court enjoined the informal request for documents in lieu of issuance of a subpoena under the New York Executive Law. The court noted that the general civil litigation procedures and discovery process provide protection to national banks from frivolous lawsuits or abusive discovery tactics.


The Cuomo decision will likely result in additional litigation by state attorneys general against national banks to enforce individual state’s laws. Some of this litigation could be politically motivated, enhanced by the current economic crisis, and will certainly focus on consumer protection issues, such as state fair lending laws or laws dealing with rights of the elderly in financial transactions.

While states’ enforcement tools may be limited to litigation, the mere threat of litigation will require banks to seriously consider the appropriate response to informal requests for information and cooperation.

National banks also will face increased regulatory and compliance challenges as they attempt to comply with a patchwork of enforcement efforts of states with varying consumer protection and lending laws. National banks may wish to develop national “best practices” that meet the highest standards of compliance among the various states in which they operate, although that may be difficult to do for all products and all consumers.

The Cuomo decision also may change the response of national banks to future litigation. Early motion practice, including motions to dismiss, may limit or eliminate overly broad or unreasonably aggressive actions. Early

battles to limit the scope of document requests and the discoverability of records may be decisive. Although national banks may still assert the defense of preemption under the National Bank Act to limit the

applicability of certain state laws, that defense will not bar state enforcement actions altogether.

The Cuomo decision raises anew what were considered to be well-settled issues of federalism and states’ rights that had favored the broad preemptive power of the OCC under the National Bank Act and the Office of Thrift Supervision under the Home Owners Loan Act.

The Obama administration’s pending revisions to financial regulations, including the plan for a Consumer Financial Protection Agency, could diminish the preemptive powers of the OCC, causing, as the proposals stated, “federal consumer protection laws to be a floor and not a ceiling.”

It is anticipated that the banking industry may seek remedial legislation to strengthen the OCC’s preemptive authority as part of the prospective legislation to effect broad reform of financial services and banking regulation.

W. Scott O’Connell, a partner in the firm of Nixon Peabody, is deputy chair of the Litigation Department and Practice Group Leader, Class Actions & Aggregate Litigation. Carolyn Nussbaum, also a partner in the firm, serves as co-chair of the firm’s Financial Services and Securities Litigation Group’s Securities Litigation and Corporate Governance Team.