The US Supreme Court in a path breaking ruling held that units of national banks were largely exempt from state regulation. The decision has infuriated critics who argue that it would further wear away the ability of California and other states to enforce consumer-protection laws. The 5-3 decision concerned a legal dispute between the state of Michigan and Wachovia Corp.’s mortgage loan subsidiary. Although consumer groups have said that banks could use the ruling to run an array of enterprises unconnected to banking, and outside the scrutiny of state regulators.
The latest decision has sustained a controversial regulation issued six years back by the Office of the Comptroller of the Currency, the chief federal bank regulator. The attorneys general and bank regulators of all 50 states had pleaded the justices to consider the regulation out of bounds, either as a misunderstanding of the National Bank Act or as a matter of constitutional federalism.
Consumer groups have told the court that a decision supporting the federal agency’s claimed power of pre-emption would supersede state oversight in circumstances when the mortgage-lending industry immediately needed strict supervision. Even though the ruling did not directly involve subprime lending, but it could have a huge impact on the ability of states to act independently on aggressive lending and throws the spotlight on federal authorities. Various consumer advocates were of the view that individual states would be able to step in more quickly than federal legislators or regulators.
As a matter of fact, tensions between state and federal banking regulators have developed since the big bank merger boom of the 1990s. Many of the largest banks, including JPMorgan Chase, had switched from state to federal charters, to some extent to invoke a pre-emption argument against states that had enforced more restraining consumer privacy and other protections in recent years.
The decision by the Supreme Court came after several years of resentful discussion over the role of state regulation in an industry, which is progressively becoming dominated by multi-state national banks with nationally focused businesses, particularly consumer lending. In addition to it, the ruling arrived amid condemnation in Congress in how both state and federal regulators have handled a brewing crisis in the subprime lending market.
