Banking Law

Back at the start of last year, when discussing the Cuomo v. Clearing House Corporation case (I expected the OCC to win, which was a bad call that surprised more than merely me), I had a feeling that those of us who had spent our careers thinking that inexorable march of national bank preemption would never be halted until the entire world was under the thumb of the OCC would soon see a countervailing move by Congress, a move that had a good chance of eventually succeeding. As I said at the time:

Even should the OCC prevail as expected, there exists the risk that a ruling to uphold the Second Circuit might be the high tide of SCOTUS preemption rulings for national banks. With a new sheriff in the White House, with the Democrats in control of the House and Senate (although control in the Senate is not  filibuster-proof), and with preemption-hating Democratic leadership in Congress influencing the public debate, I can clearly see a scenario where Barney and the Boyz lead a charge for federal legislation that shortens the reach of national preemption as it applies to certain types of state laws such as those that are the subject of this action. I see much conflation in the public mind of predatory lending, subprime lending, discriminatory lending, unregulated and regulated lenders, banks and non-banks, into one big mess of "kill them all and let God sort the guilty from the innocent." When Joe and Jane Sixpack (and their elected representatives) are looking for scapegoats, national banks will do just fine.

As I said in October 2005, I think the states will continue to lose on these issues "unless Congress changes the law." At this point, it's merely a gut feeling and nothing more, but if there ever is a time that might be ripe for such a change, this year (or next, perhaps) might be that time. Regulatory reform legislation is coming to the banking industry, and the clipping of the wings of federal preemption might be part of that package.

When I last visited the House bill provisions on preemption in December, supporters of the OCC had made headway in the House bill, and it appeared that the OCC would score a nice win. My, how times have changed.

Last week, in the American Banker (paid subscription required), reporter Cheyenne Hopkins alleged that the largest banks (all national) were leaving the OCC all by its lonesome to fight the preemption battle in the Dodd bill in the Senate. The largest banks have bigger fish to fry, like trying to save their right to engage in blatant conflicts of interest proprietary trading and to combat any meaningful unduly restrictive regulation of derivatives (games in which community banks have no skin). That makes supporters of expansive OCC preemption powers concerned that something wicked is coming their way.

The Senate bill would reestablish the so-called "Barnett" Supreme Court standard that allowed the OCC to preempt state laws on a case-by-case basis but also forced the agency to show that a federal law exists to regulate the activity addressed by the state law.

"When people say that we are simply adopting the Barnett standard, that is simply not correct," said Robert Cook, a partner in the Hudson Cook law firm. "They are adopting the Barnett standard and a couple hurdles you need to leap. ? I would be thrilled if we ended up with simply the Barnett standard. I'm afraid we are going to get much worse."

While some supporters in the Senate are crafting amendments to the Dodd bill to address the concerns of the OCC, no one thinks this is going to be an easy fight.

Cook said getting any change in the bill would be an uphill battle and that banks must choose their fights carefully. "The banks don't have a lot of time left now to make changes in the financial institution regulatory bill, and they have to pick their battles, and it's not clear to me they can fight all three or four issues," he said. "Unfortunately, large banks don't have a lot of capital to fight with right now. I am not optimistic that banks large or small are going to have much impact on this bill."

Looking for an optimistic angle in this sea of sorrow, American Bankers Association CEO Ed Yingling correctly called the ultimate winners on this issue, regardless of how much of a beating preemption takes in the Senate (and in the reconciliation process with the House bill already passed): trial lawyers.

Any new language in the reform bill would effectively nullify decades of preemption decisions by the courts, sparking more court cases. "It will take years and years of litigation to figure out what the new law means, creating uncertainty," Yingling said.

State regulatory officials agreed. "This isn't going to be resolved in the Senate," said Ryan. "Whatever comes out of the Senate is going to create ambiguity and a role for courts."

In a country with more than one lawyer for every 300 citizens, and with new litters of barristers and solicitors being birthed by the nation's law schools every six months or so, the mantra regarding this legislation is: "THIS is the change we've been waiting for! Sue, Baby, Sue!"