Financial Services Issues.com

This ruling effectively subjects national banks to 51 different sets of regulations, some of which could be conflicting. This will obviously create complexity, confusion, uncertainty, and added costs to banks’ compliance efforts. Additionally, this “opens a ‘backdoor’ for states to review safety and soundness of national banks,” according to FinCriAdvisor.com:

The ability now of states to prosecute national banks for consumer compliance violations means they also can go after issues of safety and soundness, says former OCC Chief Counsel Brian Smith, now a partner with Latham & Watkins in Washington, D.C.  "I don’t see how one enforces a state law without implicating the actions of an institution, which is the reason for a bank examination. A bank examiner goes in, sees what a bank is doing and determines if it is safe and sound and complies with the law. Now the states can look at a practice and say, ‘That doesn’t look legal. Here’s a subpoena. Send us all your records.’ Then the results of their enforcement actions are likely to have a material effect on the business practices of the bank, which ultimately is the safety and soundness of the bank itself." [1]

 

Many industry analysts contend that the additional regulatory burden will adversely affect the profitability and valuations of national banks. "The more states you’re doing business in, the more vulnerable you are," said Paul Miller, managing director of financial services at FBR Capital Markets, in a phone interview.  Ultimately, he said, "the Supreme Court decision is another step in the direction of banks becoming regulated utilities, which will most likely lead to lower return on equity and valuations," Miller wrote in a research note to clients.[2]

 

Others supported the ruling, particularly because it comes at a time when the Obama Administration is seeking regulatory reform to enhance consumer protection in financial services. "It’s not a patchwork, it’s a very healthy set of checks of balances," said Kathleen Day, a spokesperson for the Washington office at the Center for Responsible Lending, a non-profit supporting the consumer-protection legislation. "The checks and balances will address the problems that brought us this crisis," she said. "It’s good for everyone in the long-term and for the economy."

Indeed, those consumer safety harnesses were missing when Countrywide underwrote a massive, and ultimately disastrous, $1.5 trillion loan portfolio with significant exposure to subprime and other risky borrowers.[3]

 

Predatory industry lending practices combined with a weak federal regulatory response, and banks using the OCC to shield themselves from state consumer protection efforts directly led to this ruling. "Part of the financial crisis was due to states not being able to do more," says Raskin, who also worked for the New York Fed and the U.S. Senate Banking Committee. "When the states tried to examine those activities – subprime and predatory loans – we were told point blank by the federal regulators, ‘This is not your jurisdiction.’ That would have been fine if they had done something. But they didn’t."[4]

 

In addition, the Obama plans call for a Consumer Financial Protection Agency that would take over all rule-making and enforcement of banking compliance appears to overlap with states’ newly permitted authority, Smith says. "I am confused on what the role of that regulator will be," he says. "I see the potential for duplication, confusion and inefficiency. This new agency now is proposed to do exactly what the Supreme Court said is OK for the states."[5]

There is also a third faction that believes this ruling will not have a significant impact on the industry:

Some of the industry’s allies said yesterday’s decision is hardly disastrous for banks, given that state officials will not have the power to demand documents or compel executives to submit to questioning without a court order.

"Obviously there’s going to be some additional burden on the big banks," said Seth Galanter, of counsel at the law firm of Morrison & Foerster, who filed a brief on behalf of former comptrollers of the currency. "But civil litigation has always been available to private parties. This just adds state attorneys general to the list of groups that can sue."

 

In my opinion, this development underscores the need for a strong national consumer protection regulator that enforces consistent and robust rules on a national basis. While the financial services industry may fear the added burden that Obama’s proposed Consumer Protection Agency would present, but it would be preferable to the alternative of dealing with 50 different state attorneys. Strong consumer protection on a national level would negate the need for states spending the time and expense of taking banks to court. It would also have the additional benefit of covering non-bank lenders, like mortgage brokers.

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