Federal law doesn’t entirely pre-empt states from passing consumer-protection laws governing national banks and seeking to enforce those laws in court, the U.S. Supreme Court held today.

The 5-4 decision was a defeat for the banking industry and the Office of the Comptroller of the Currency, the federal regulator that maintained only it had the power to conduct bank examinations or enforcement actions against national banks.

The banking industry has warned that if states can adopt and enforce their own regulations, banks will be subject to a "patchwork" of rules, creating additional regulatory compliance costs that are passed on to consumers.

Consumer groups have argued that federal regulators have been lax in enforcing fair lending laws, and that additional involvement by the states is needed.

The Obama administration’s proposed reorganization of the financial regulatory system would protect the right of states to build upon mortgage lending rules to be drawn up by a new consumer protection agency.

The Supreme Court was ruling in a case involving attempts by the New York Attorney General’s Office to obtain records from banks to determine if minorities were steered into high-cost mortgage loans in violation of the state’s fair lending laws.

The court found that state attorneys general don’t have the power to issue subpoenas on their own authority — as former New York Attorney General Eliot Spitzer had attempted to do in the disputed case — but can bring civil suits against national banks or obtain information through court-issued search warrants.

In overturning a previous ruling by the 2nd U.S. Circuit Court of Appeals that said states were pre-empted from taking such action, the court agreed that only the federal government is empowered to oversee some aspects of national banks’ operations — licensing and registration, for example. But states "have always" enforced general laws against national banks, and have enforced "banking-related laws" against national banks "for at least 85 years," Justice Antonin Scalia wrote for the majority.

The Office of the Comptroller of the Currency’s "expansive" interpretation of the National Bank Act of 1864 — in which the regulator maintained that states lack not only "visitorial powers," such as the ability to conduct examinations or inspect the books or records of national banks, but also the power to prosecute enforcement actions — represented an "incursion upon state powers," Scalia said.

The Office of the Comptroller of the Currency — which under the Obama plan would be merged with the Office of Thrift Supervision to create a single bank regulator — issued a statement expressing disappointment that the Supreme Court disagreed with its interpretation of the law.

Comptroller of the Currency John Dugan said the OCC is "absolutely committed to strong oversight and enforcement of the fair lending laws" and looks "forward to working with the states" to ensure fair access to financial services and fair treatment of consumers.


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