Banks on tighter leash after High Court ruling

By Jonathan Stempel - Analysis

NEW YORK (Reuters) - The U.S. Supreme Court decision to let states enforce their consumer protection laws against federally chartered banks will give regulators greater power to police lending abuses in an industry already under intense pressure to reform.

Monday''s 5-4 ruling striking down a rule by the U.S. Office of the Comptroller of the Currency barring state oversight is likely to fuel critics who believe lending abuse has driven millions of people into financial distress, whether through mortgages, credit cards or other forms of consumer credit.

"This is a real win for consumers," said James Cox, a law professor at Duke University in Durham, North Carolina. "It opens up a vast area for state and local regulators, and is a serious loss for the banking industry. One would hope banks will become more circumspect about their activities, especially given how they''re being regulated like never before."

The ruling revives a probe by New York Attorney General Andrew Cuomo into whether banks such as Citigroup Inc (C.N), HSBC Holdings Plc (HSBA.L), JPMorgan Chase & Co (JPM.N) and Wells Fargo & Co (WFC.N) were subjecting black and Hispanic borrowers to higher interest rates on mortgage loans. Cuomo''s predecessor Eliot Spitzer had begun the probe in 2005.

It remains unclear how the ruling affects President Barack Obama''s push for a new Consumer Financial Protection Agency as part of his financial regulation overhaul.

That proposal would move oversight on credit cards, mortgages and other products from about 10 agencies into a single panel. States would be able to enforce the new federal rules, and impose their own tougher rules where appropriate.

But the need for a new pro-consumer agency may prove "not as great as we thought if the states can enforce their own consumer protection laws," said Kevin Petrasic, a lawyer at Paul, Hastings, Janofsky & Walker LLP in Washington, D.C., and former counsel at the Office of Thrift Supervision.

He also said the ruling could backfire on consumers if national banks were suddenly "subject to a whole host of state laws" as well as new federal laws. "It could result in a fairly significant increase in the cost of credit," he said.

REJECTING "BIZARRE" RESULT

Monday''s decision rejected an OCC rule that essentially preempted states from enforcing their own fair lending, consumer protection and anti-discrimination laws, even when federal law appeared inadequate to protect consumers.

The case created a situation in which the states'' rights argument, generally associated with more conservative thinking, was advanced on behalf of consumers, while the supremacy of national bank laws was advanced on behalf of lenders.

With the support of the other 49 states and Washington D.C., Cuomo argued that striking the rule would not unfairly burden banks, given that they already have to defend their actions under state law in lawsuits brought by investors.

The OCC opposed the change, as did a group of more than a dozen big banks, citing the potential for a costly blizzard of conflicting federal and state regulations.

Justice Antonin Scalia, one of the Court''s more conservative members, joined the four most liberal justices in concluding it would be "bizarre" for the OCC to block states from enforcing valid, non-preempted laws against national banks, such that "the bark remains, but the bite does not."

In allowing lawsuits, Scalia said it would be up to judges to prevent states from engaging in unwarranted "fishing expeditions" to find evidence of wrongdoing.  Continued...