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Supreme Court 'surprise' boosts state consumer power

Supreme Court's Cuomo v Clearing House decision strips US Treasury OCC of its power to stop state consumer laws, says FBR analyst Paul Miller.

Monday's Supreme Court bank decision (Cuomo v. Clearing House, 08-453) "takes away preemptive power" from U.S. Treasury bank regulators "regarding state consumer protection laws," writes Paul J. Miller Jr., analyst at Friedman Billings Ramsey.

Treasury's bank regulation arm (the Office of the Comptroller of the Currency) had a policy that lets federal law pre-empt state consumer laws, so states can't enforce stronger protections than the Comptroller agrees to enforce. Big national banks like that policy. Makes it a lot easier to build national mortgage and credit card businesses without tough, idiosyncratic state consumer protections complicating the way and the things banks sell.

But a 5-Justice majority opinion by conservative Justice Antonin Scalia, backed by the Court's more liberal justices, found the Comptroller exceeded its authority under the National Bank Act, and states should have more power to enforce their own consumer laws. The minority, conservatives led by Justice Clarence Thomas, said the act is so vague, the feds were within their rights to quash states' rights.

Analyst Miller says the decision will make it easier for Obama to let states to enact pro-consumer banking laws, as proposed. He also predicts higher bank expenses as lenders struggle with divergent state laws. 

I ran that by bank lawyer Alan Kaplinsky at Ballard Spahr, who's represented Delaware credit card banks that prospered under federal pre-emption of state credit laws. "The Cuomo case is based on Section 484 of the National Bank Act," which is about deception and unfair practices. "It's about who gets the right to enforce state laws against national banks." The ruling will let states sue banks for alleged deception and unfair practices. But it won't hurt lenders' ability to "export" rates and fees from bank-friendly places like Delaware under the act's Section 85.

Kaplinsky is more worried about Obama's pending bank reforms, which in their draft form give states more power, including the power to limit rates and fees. He's hoping this isn't a main goal for the president and he'll let rate "exportability" stand.

Ballard case comment here. More on the case from law firm Stinson Morrison Hecker's BankBits newsletter here.