Banking Law Prof Blog

What Exactly Is a Dual Banking System?

One reader of this blog asks, "What exactly is a dual banking system?"  So here's the background:

In the U.S. today, we have two types of bank charters:  1.  Each State has the authority to charter and supervise banks within its borders through a State Banking Commissioner and State Banking Department (although states may consolidate regulation of banking with other industries such as insurance and name their supervisory department something different); and 2.  At the federal level, the Office of the Comptroller (OCC) has the authority to issue national bank charters and has exclusive supervisory authority (sometimes called "visitorial power") over national banks.

National banks trace their existence and powers to the National Bank Act of 1864.  The national bank charter was instituted as a means of raising funds for the Civil War.  State chartered banks were already in existence and continued on a parallel track with national banks. Many present-day legal disputes over the powers of national banks go back to the original language of the National Bank Act of 1864.  Of course, the National Bank Act has been amended repeatedly since then and the business of banking has evolved into many areas that could not have been foreseen in 1864.

FDIC statistics show that as of 3/31/09, there are 1,519 commercial banks (not thrifts or credit unions or other lending institutions but insured deposit-taking institutions with a bank charter) operating as national banks and 5,518 commercial banks operating as state-chartered banks.  The organizers of a bank can choose whether to operate under a state or national charter when the bank is formed and they can switch charters from state to national or national to state at any time (unless they are in poor financial condition and a charter change will not be approved). 

What factors influence choice of charter? 

• Those who choose a national charter often cite nationwide uniformity of regulation; thus most really large banks hold a national charter. 
• Those who choose a state charter are often smaller community banks that focus on a smaller geographic area and like the idea of going to the state capital to deal with a banking department that is smaller and more accessible, with decisions made on the basis of state-wide conditions.  However, there are also many smaller community banks holding national charters. 
• A comparison of charter fees, assessment fees, perceived expertise of examination staff, prior good or bad experience with the regulator, and perceived strictness of regulation may influence charter choice. 
• Because both national and state regulators are funded by fees and assessments paid by the banks they regulate, regulators in effect compete to get more and larger entities to choose their charter.  In the worst case, this can lead to a "captive" regulator who trades on "lax regulation" to gain in the turf war.  Commentators cite the former Federal Home Loan Bank Board that chartered federal savings and loan associations up until the S&L crisis of the 1980s as the poster child for a "captive" regulator that kowtowed to the industry it was supposed to regulate.  As a result, Congress dissolved this agency and created the Office of Thrift Supervision ("OTS"). 
• Nationwide banking operation, whether under a national or state charter, has brought convenience and lower cost financial products to consumers.  It is possible to operate a nationwide banking system under a charter from one state, with authorized branches in other states.  This does require complying with laws in each state of operation and increases the cost of compliance.  On the other hand, the costs of trying to evade state consumer protection have been quite high for consumers and the economy.  
• Over the past five years, the Office of the Comptroller of the Currency ("OCC"), the chartering authority for national banks, and the Office of Thrift Supervision ("OTS"), the chartering authority for federal thrifts, have responded to their industries by aggressively claiming that more and more state laws are preempted by the National Bank Act.  Former Comptroller of the Currency John D. Hawke openly marketed the national bank charter as a way to escape state consumer protection laws.  Subsequent Comptrollers have continued to pursue litigation to shield national banks from state laws.  
• Two recent Supreme Court decisions have addressed federal preemption. 
  •  In Watters v. Wachovia (2007), the Supreme Court allowed a mortgage lending corporation (not a depository institution but a state corporation) to exempt itself from state consumer protection law by becoming an operating subsidiary of a national bank.  Thus on one day, the entity was required to submit to registration requirements under Michigan law, but on the day after it was acquired as a subsidiary of a national bank doing exactly the same mortgage lending it had previously previously conducted in the State of Michigan, it placed itself beyond the reach of Michigan consumer protection law.  Although the OCC claimed exclusive "visitorial power" over subsidiaries of national banks to the same extent it possessed exclusive "visitorial power" over the banks themselves, the OCC never had the staff, the funding, or the schedule to go into operating subsidiaries to check on their lending practices as they did for banks themselves.  Wachovia (failed), Wells Fargo, Citibank (troubled), HSBC all had subprime mortgage lending subsidiaries that were exempt from state consumer protection laws.  One has to question why the OCC expended its resources fighting the State's efforts to enforce consumer protection laws instead using those resources to cooperate with the States to ensure consumer protection. 
  • In Cuomo v. Clearing House Association (2009), the Supreme Court found that the OCC had overstepped its legal authority in claiming that a State Attorney General could not sue a national bank for violations of valid state consumer protection and anti-discrimination laws.  The OCC had claimed that it was the only enforcer of consumer protection for national banks -- with the obvious problem that it was not equipped to do that job.  This month, the Supreme Court ruled that a State Attorney General can sue a national bank to enforce state consumer protection laws. 
  • The Obama administration's draft legislation presented to Congress this week (which I have outlined in a previous post) would reverse the Watters decision and allow States to pass and enforce consumer protection laws which are expressly not preempted by federal law, even when the State law sets a higher consumer protection standard than federal law, as long as the State law applies equally to State banks and National Banks (and subsidiaries).
  • The draft legislation would adopt the Cuomo decision, making it clear that State Attorneys General can sue national banks to enforce valid state consumer protection laws.  
• Some people as whether the State banking charter has any value today.  They may also ask why we do not have a single federal banking charter and a single national bank regulator.  Stated another way, why should we continue to have a "dual banking system," with the ability to choose either a State or a National Bank charter?  
  • Our nation is based on a balance between State and federal powers.  Americans have never wanted the federal government to overpower the ability of States to address issues particular to their citizens.
  • The Constitution's Tenth Amendment recognizes "federalism" and the state/federal balance by providing that powers not expressly granted to the federal government are reserved to the States and the people.
  • Congress and the Supreme Court have expressed reluctance to preempt state laws unless there is a strong reason to do so,
  • State banks have been described as "laboratories of innovation."  The State banks originated checking accounts, the first NOW accounts which paid interest, and interstate branching.  A State legislature can move more quickly than Congress to adopt new practices and products that apply to a more limited area.  If successful, the innovations can spread, and if not, they can be changed.
  • Having a single charter and a single regulator would create a monopoly, which is less efficient and less responsive that when we have a choice between state and federal regulation.  A single regulator can be coopted more easily by industry.  Absolute power corrupts.  There would be few checks on a single regulator's mistaken understanding of the economy or failure to regulate appropriately.  With the dual banking system, state regulators can catch issues that might be missed by a single federal regulator.
  • State and federal regulators have a long, successful track record of cooperating in bank examinations and regulations.  Cooperative pooling of resources leads to better oversight coverage.  Incorporating both State and national perspectives leads to a more comprehensive understanding of the economic costs and benefits involved in banking regulation.   

Link to FDIC's website for a very simplified timeline of banking from the 1700s to the 2000s:  http://www.fdic.gov/about/learn/learning/when/1700s.html

(ag) July 2, 2009, in Dual Banking, Federal Preemption 

Analyzing the Consumer Financial Protection Agency Act of 2009

      On June 30, 2009, the administration delivered to Congress legislation which provides details behind the broad Financial Regulatory Reform White Paper.  The draft “Consumer Financial Protection Agency Act of 2009” raises many critical issues, including:

 

•  Mission and Scope of Authority.   The CFPA’s broad mission is to protect consumers of all types of financial products and services.  This represents an effort to regulate unregulated financial institutions, to centralize consumer financial protection so as to minimize inconsistencies in regulation, and to address the reality that consumer protection issues have been marginalized by agencies with other responsibilities such as safety and soundness.

      A key concern here is whether consumer financial protection regulation can or should be compartmentalized.  Prudential regulation, which emphasizes financial solvency, must take account of the consumer protection performance of a financial institution to insure long-term viability.   Safety-and-soundness and consumer protection have long been regarded by the best bank regulators as complementary rather than contradictory.

A positive aspect of the proposal is the regulation of previously unregulated providers of financial products and services.  This is long overdue.  Had all mortgage brokers and lenders been subject to a level playing field of consumer protection oversight, many of the abuses leading to the subprime mortgage meltdown might have been controlled. 

      
• Composition of the new CFPA Board.  The five-member governing Board will include four public members appointed by the President and confirmed by the Senate as well as the Director of the National Bank Supervisor, another new agency combining the responsibilities of the Office of the Comptroller of the Currency (“OCC”) and the Office of Thrift Supervision (“OTS”).  One can question whether the new national bank regulator is given a disproportionate voice at CFPA, with only “consultation” to be provided by State regulators, the FDIC, and the Federal Reserve.

• Staffing.  Each of the existing federal bank regulatory agencies will transfer its current consumer protection division to the CFPA.  This proposal assures expertise and minimizes start-up time for the new agency.  The greatly expanded jurisdiction over new entities, products, and services will, however, require the new agency to recognize and allocate staff resources among at least three models for regulation.  I describe these as:  1.  “examination-driven” regulation, which is highly staff intensive because it is based on periodically scheduled on-site visitation;                     2.  “complaint-driven” regulation, which is less staff intensive and less comprehensive because it calls for regulatory attention only when triggered by a certain level of consumer complaints; and 3.  “report-driven” regulation,  like the current review of Home Mortgage Disclosure Act (“HMDA”) data by the Federal Reserve Board which analyzes information required to be submitted and produces a report lagging real time by almost two years. 

• Funding.  The Plan outlined in the White Paper calls for the CFPA to be “independent” of the industries it regulates.  As background, the existing federal banking agencies are funded, not through taxpayer monies but through charter fees and assessments raised from the entities they regulate.  This provides a perverse incentive for agencies to compete with each other to provide the most favorable, least restrictive regulation in order to increase the number and size of institutions they regulate.  “Captive” regulators have marketed their charters as a way to escape consumer protection statutes. 

Details provided in the draft legislation call for the agency to be funded through Congressional  appropriation, authorizing Congress to say how much the agency can spend; however, the legislation goes on to provide that the CFPA shall recover the amount of funds expended through collection of annual fees or assessments on covered entities.  Will continuing the practice of funding a regulatory agency from its regulated constituents result in “capture” of this new agency?

• Clarification of Federal Preemption.  The proposed legislation reestablishes balance between State and federal authority over consumer protection.  States are expressly permitted to enact and enforce consumer protection laws that are more stringent than federal laws.

The 2007 Supreme Court decision in Watters v. Wachovia would be overturned by making State consumer protection laws applicable to national banks and their operating subsidiaries to the same extent that they apply to state banks.  State consumer protection laws are declared not inconsistent with federal law and thus not preempted if they afford consumers greater protection than federal law, making federal consumer protection laws “the floor rather than the ceiling.” 

Industry representatives are sure to complain that the result will be fifty different state standards which will increase the costs of financial products and inhibit innovation.  These arguments must be judged in light of the high costs to all consumers and to our economy which resulted from aggressive preemption of state consumer protection laws.  Large nationwide financial institutions have the capability to research and coordinate legal requirements as they did prior to 2004 when the pace of federal preemption as a means of escaping state consumer protection laws accelerated.

The 2009 Supreme Court decision in Cuomo v. Clearing House Association is affirmed with language defining “visitorial powers” of the national bank regulator.  State attorneys general are expressly authorized to bring lawsuits to require national banks to produce records for investigations into violations of State consumer laws and to enforce any applicable federal or State law.

•  Establishment of a Victims Relief Fund.  Providing that civil money penalties will go into a fund available for restitution rather than into general revenue is a positive step. 

• Weighing Costs and Benefits of Regulation.  CFPA must, in the exercise of its rulemaking authority, consider potential benefits and costs to consumers and regulated entities.  Troubling language in the statute provides that CFPA may not declare a consumer financial product or service unlawful unless it “causes or is likely to cause substantial injury to consumers which is not reasonably avoidable by consumers and such substantial injury is not outweighed by countervailing benefits to consumers or to competition.”  Under this standard, “teaser rate” mortgages would not be unfair to consumers who could avoid injury by refusing the loan. 

 

(ag) July 1, 2009, in Congress, Economy, Federal Banking Regulators, Federal Preemption

Arthur Wilmarth Interview on Cuomo Decision

National Public Radio talked with George Washington University Law Professor Arthur Wilmarth yesterday.  He is a highly regarded proponent of the dual banking system and an opponent of aggressive federal preemption in the financial institutions arena, as well as a prolific author of Law Review articles in the banking law field. 

Link to interview:  http://www.npr.org/templates/story/story.php?storyId=106062165

(ag) June 30, 2009, in Federal Preemption/Dual Banking

Analysis of the Cuomo Opinion

Today, the U.S. Supreme Court delivered its opinion in Cuomo v. Clearing House Association, upholding the power of States to enforce their own non-preempted consumer protection laws by bringing suit against national banks and their affiliates.

This opinion was one of the very last to be published before the end of the Supreme Court’s 2008 term.  Justice Scalia authored the majority opinion, joined by Justices Stevens, Souter, Ginsburg, and Breyer.  Justice Thomas filed an opinion concurring and part and dissenting in part, joined by Chief Justice Roberts and Justice Alito.

The majority opinion finds that the Office of the Comptroller of the Currency (“OCC”), the chartering authority and federal regulator of national banks, promulgated a regulation and an interpretation of its regulation that do not comport with the National Bank Act and are, therefore, invalid. 

States do have the power to sue national banks for violation of state consumer protection laws.  

 The background of the case involved an investigation by the New York Attorney General, triggered by data indicating racial disparities in loans by national banks headquartered in New York made to white borrowers and loans the same banks granted to African-American borrowers.  Rather than respond to the Attorney General’s request for information that might explain these racial disparities, the national banks, including Wells Fargo, HSBC, J.P. Morgan Chase, and Citibank, and others that are members of the financial institution trade group, Clearing House Association, L.L.C., filed suit to block his investigation.  The OCC and the national banks agreed that state consumer protection and anti-discrimination laws in this case were valid and not preempted, but they said the State could not enforce its laws against national banks.  The OCC claimed that lawsuits against national banks were preempted because only the OCC had “visitorial power” over national banks and their operating subsidiaries.

The Supreme Court declared that the OCC’s regulation purporting to preempt State law enforcement is not a reasonable interpretation of the National Bank Act.  The majority opinion makes a distinction between “visitorial powers,” which the National Bank Act gives exclusively to the OCC, and the State’s power to enforce the law.  The majority opinion gives cursory acknowledgment to the Chevron Doctrine, under which courts defer to reasonable agency interpretations of statute, but goes on to say that “the presence of some uncertainty does not expand Chevron deference to cover virtually any interpretation of the National Bank Act.  We can discern the outer limits of the term “visitorial powers” even through the clouded lens of history.  [Visitorial powers] do not include, as the Comptroller’s expansive regulation would provide, ordinary enforcement of the law.”

Justice Scalia’s majority opinion recognizes that when a State sues a national bank, the normal rules governing litigation protect against overbearing.  The majority opinion did find that the State’s power to issue subpoenas under its own authority, rather than that of the court, is preempted.  As a result, the Attorney General’s letter request for information was preempted to the extent that it was a veiled threat to exercise subpoena power the Supreme Court declares preempted.  

The majority opinion turns on the term “visitorial powers” in the National Bank Act, coupled with the Supreme Court’s extensive analysis of the historical reach of “visitorial powers” and prior Supreme Court opinions, such as Guthrie v. Harkness, 299 U.S. 148 (1905) and First National Bank in St. Louis v. Missouri, 263 U.S. 640 (1924) , which upheld the right of a private citizen and the right of a State Attorney General, respectively, to bring suit against national banks to enforce State law.  The majority did not engage in a formal Chevron analysis and did not flatly say that the OCC’s interpretation was “unreasonable,” although that is the implication.  The Supreme Court says that “the presence of some uncertainty does not expand Chevron deference to cover virtually any interpretation of the National Bank Act.”   The majority opinion does not invoke the presumption against preemption and finds it “unnecessary to do so in giving force to the plain terms of the National Bank Act.”  On the other hand, the Court says, “Neither should the incursion that the Comptroller’s regulation makes upon traditional state powers be minimized.”  The majority opinion also notes that, “The consequences of the regulation also cast doubt upon its validity.”  It is reassuring to note that the Court does look at context and effect and does not merely rubberstamp an agency’s regulations.  The Court endorses cooperation between federal and state regulatory structures, saying, “This system echoes many other mixed state/federal regimes in which the Federal Government exercises general oversight while leaving state substantive law in place.”  

 The reach of Watters v. Wachovia, 550 U.S. 1 (2007), is strictly limited by Cuomo:  “The sole question was whether operating subsidiaries of national banks enjoyed the same immunity from state visitation.  The opinion addresses and answers no other question.”

Interestingly, Justice Ginsburg authored the Watters opinion, which upheld an OCC regulation invoked against a State banking commissioner attempting to enforce a state registration requirement against a state-chartered mortgage lender which became an operating subsidiary of a national bank to evade state consumer protection regulation.  Justices Breyer, Souter, Kennedy, and Alito joined the majority in the Watters case.  Justice Stevens filed a blistering dissent in Watters, joined by Justices Scalia and Chief Justice Roberts.  Justice Thomas took no part in the Watters case.

Justice Thomas’s dissenting opinion in Cuomo would have found the term “visitorial powers” ambiguous and allowed the OCC free rein to interpret that statutory term under the Chevron Doctrine.  The dissent relied on National Cable & Telecommunications Association v. Brand X Internet Services, 545 U.S. 967 (2005), for the proposition that:  “A court’s prior judicial construction of a statute trumps an agency construction otherwise entitled to Chevron deference only if the prior court decision holds that its construction follows from the unambiguous terms of the statute and thus leaves no room for agency discretion.”  Justice Thomas thus dismissed Guthrie and St. Louis, discussed above.  Justice Thomas would not require a clear statement from Congress before allowing a federal agency to preempt state consumer law.

My analysis:  The Cuomo opinion must be read in light of the subprime lending crisis which has bloomed into a recession after the commencement of this case.  This case was brought for the express purpose of blocking State investigation into abusive lending.  Unchecked abuse is exactly what happens when a powerful federal agency crusades to enlarge its own jurisdiction and protect rather than regulate the industry it oversees.  Common sense has indicated for at least the last five years that the OCC has neither the staff nor the inclination to enforce consumer protection laws.  How could it not have been apparent to Congress and the courts that acquiescing in this agency’s aggressive efforts to prevent any other entity doing so would have disastrous results for consumers and for the economy?

As Congress now turns its attention to designing the optimal regulatory structure for financial institutions, one can hope that they will not ignore these lessons: 

• The dual banking structure, with equal standing for state and national charters, is an essential balancing component within our national economy.  
• State and federal agencies can and do cooperate in consumer protection and in bank regulation.  The long history of successful cooperative regulation should preclude any suggestion that the federal government should stand in the way of state consumer protection laws and enforcement. 
  
• No federal agency should be allowed to market a charter as a get-away-with-it-free card providing immunity from state consumer protection laws. 
  
• If the state/federal balance is restored, it will provide checks against any one agency or any one type of charter ignoring consequences for consumers and for the economy.
  

The Cuomo opinion reassures us that States can adopt and enforce consumer protection laws evenhandedly with respect to all financial institutions, regardless of charter.  Federal agency and financial institution resources that have, until now, been devoted to fighting consumer protection laws should now be invested in protecting consumers from financial abuse.

(ag) June 29, 2009, in Federal Preemption

Supreme Court Overturns OCC's Preemptive Regulation in Cuomo v. Clearing House Association

The U.S. Supreme Court released its opinion in Cuomo v. Clearing House Association this morning.  The good news for States and for consumer protection is that the decision invalidates an Office of the Comptroller of the Currency ("OCC") regulation to the extent it would have prohibited a State Attorney General from going to court to enforce valid state consumer protection and anti-discrimination statutes against national banks.

Finally, the Supreme Court has found that there is some "outer limit" to the OCC's preemptive authority, which has proceeded over the past 10 years to aggressively undercut the dual banking system and the power of the States to protect their own citizens from abusive lending practices.

Link to Supreme Court opinion:  http://www.supremecourtus.gov/opinions/08pdf/08-453.pdf

A more complete analysis of the Cuomo opinion and a comparison with Watters v. Wachovia will follow later today.

(ag) June 29, 2009, in Federal Preemption/Supreme Court

Extending Full FDIC Coverage for Payroll Accounts

FDIC is proposing two alternatives for phasing out the Transaction Account Guarantee Program, originally set to expire December 31, 2009.

Option One:  The program, which provided full FDIC coverage of non-interest-bearing accounts such as payroll accounts (which often exceed insured limits just before payday), would be terminated on December 31, 2009, as originally scheduled.

Option Two:  The TAG Program would be extended for an additional six months, until June 30, 2010.  Insured depository institutions currently participating in the TAG Program would be offered a one-time opt-out opportunity.  Those that opt-out would have to disclose the fact that they are no longer participating.  Those that continue coverage would be subject to increased fees.

Background Info:  FDIC originally extended insurance coverage of these non-interest-bearing accounts for participating institutions that paid additional fees because of analysis that indicated that the financial crisis was causing uninsured depositors to remove their funds from any institution that might be troubled.  FDIC's analysis showed that, "A five percent reduction in uninsured deposits
would reduce Gross Domestic Product growth by 1.2 percent per year in a normal economy and 2.0 percent per year in a stressed economy. With U.S. economic growth currently stressed, a run of this magnitude could result in, or deepen and prolong, recession. FDIC data indicate rapid and substantial outflows of uninsured deposits from institutions that are perceived to be stressed. The systemic nature of this threat is further evidenced by the increasing number of bank failures."

Link to Proposal, which has a 30-day comment period which is now open:  http://www.fdic.gov/news/board/june2309no6.pdf

(ag) June 28, 2009, in Deposit Insurance

Proposed Amendments to CRA Rules - The Comment Period is Open

The federal banking agencies (OCC, FRB, OTS, and FDIC) are proposing amendments to their Community Reinvestment Act regulations.  The comment period will extend for 30 days after publication in the Federal Register.

Changes incorporate a statutory requirement that the banking agencies consider low-cost education loans to low-income borrowers as a factor in evaluating a financial institution's record in meeting community credit needs.

Other proposed changes to the relevant factors include:  capital investment, loan participation, and other ventures undertaken with minority and women-owned financial institutions and minority credit unions.

Link to Proposed Regulations:  http://www.fdic.gov/news/board/june2309no8.pdf

(ag) June 28, 2009, in CRA

Madoff Sentencing Tomorrow

Bernie Madoff appears for sentencing on Monday and is expected to receive a life sentence.  This guy goes down in the annals of white collar crime and SEC oversight failures as the mastermind of one of the most spectacular Ponzi schemes in recent memory -- good news only for business law professors who will be using him as the poster child for financial greed and investment fraud. 

Link to story:  http://news.yahoo.com/s/nm/20090628/bs_nm/us_madoff

(ag) June 28, 2009, in Securities Law

Bank Compliance Officer Gallows Humor

Check out the compliance officer's viewpoint on financial institution-related regulatory changes, courtesy of the West Texas Compliance Officers' Association:

Link: 

Download Compliance Officer - Run Over by Regulations

State Officials Testify About Obama Plan and State Consumer Protection

The House Financial Services Committee held its first hearing on President Obama's Plan for the Restructuring of the American Financial Regulatory System. 

As expected, the proposed independent Consumer Financial Protection Agency is garnering attention -- pro and con.  Testimony from State officials supports the President's plan to restore balance to the Dual Banking System that represents a cornerstone of the U.S. financial system by rolling back some inappropriately aggressive attempts to exclude national banks and their affiliates from the reach of state consumer protection laws. 

The House Financial Services Committee website carries a webcast of the hearing and the Conference of State Bank Supervisors (CSBS) reported on the hearing in its weekly bulletin, quoting Massachusetts Secretary of the Commonwealth William Galvin as saying that,  "Investors and consumers have been harmed when the states have been preempted from protecting their interests. . . .States remain the regulators that are closest to the investing public, and they have demonstrated they can respond quickly and effectively to help investors.” He also discussed the good track record states have in coordinating their regulatory efforts with federal examination and enforcement.    

Link to Hearing:  http://www.house.gov/apps/list/hearing/financialsvcs_dem/fullhr_061109.shtml

(ag) June 26, 2009, in Consumer Protection/Dual Banking

The Supreme Court on Age Discrimination

The Supreme Court says that the plaintiff in an Age Discrimination in Employment Act (ADEA) "disparate treatment" lawsuit must prove, by a preponderance of the evidence, that age was the “but-for” cause of the challenged adverse employment action. The burden of persuasion does not shift to the employer to show that it would have taken the action regardless of age, even when a plaintiff has produced some evidence that age was one motivating factor in that decision.

The standard under the ADEA differs from that applicable to "mixed-motive" lawsuits brought under Title VII of the Civil Rights Act.

This June 18, 2009, five-to-four opinion was written by Justice Thomas joined by Chief Justice Roberts and Justices Alito and Scalia, with Justice Kennedy as the swing vote for the majority.

Link to Opinion in Gross v. FBL Financial Services, Inc.: http://www.supremecourtus.gov/opinions/08pdf/08-441.pdf

(ag) June 26, 2009, in General Banking/Employment Law

Credit Cards: Getting Hurt When It's Not Your Fault

Credit card companies have a new business practice that damages credit ratings for customers who have done nothing wrong.  Many cardholders with excellent credit ratings and no late payments are receiving notices that their credit limits are being reduced.  Because FICO scores are based in part on credit-balance-to-credit-limits ratios, this can affect a consumer's credit rating and therefore the ability to get a mortgage or car loan at all, or at least make the interest rate obtainable significantly higher.

Business Week reports that "about 11% of customers who saw their limits cut had no "risk triggers" during that period and generally had very high credit scores. Risk triggers include late payments, excessive cash advances, check bouncing, collecting unemployment, or having a mortgage in an area where property values are plummeting."

So, who are the customers on the receiving end of this practice?  Borrowers with low-balance or inactive accounts.

What could be the reason for doing this?  Perhaps it's to get ahead of future requirements to give cardholders more notice before raising rates.  Or, perhaps the card companies think today's stellar customer might in the future lose employment and start drawing on unused credit lines, even though there's no sign that in the customer's profile today.

Here's another possibility not suggested by the Business Week article:  Perhaps card companies want to cut credit limits now and make the customer agree to a higher interest rate if they seek a higher credit limit in the future OR maybe, after the card company cuts the credit limit to a point just above the current credit balance, the customer will be more likely to inadvertently exceed that new limit and have to pay overlimit fees.

Credit card companies may explain this as a risk reduction measure, but where's the real risk?

What do you think?

Link to story:  http://finance.yahoo.com/banking-budgeting/article/107232/credit-card-companies-who-qualifies-now?mod=bb-creditcards

(ag) June 24, 2009, in Economy

 

Federal Open Market Committee Statement Today

The Federal Open Market Committee (FOMC) of the Federal Reserve, the group responsible for setting target federal funds interest rates issued a statement today, announcing that the target interest rate would remain unchanged -- between 0 and 1/4 %.  Rates are expected to stay "exceptionally low"  for "an extended period." 

The vote for this FOMC decision was unanimous.  Members of the FOMC are:  Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Donald L. Kohn; Jeffrey M. Lacker; Dennis P. Lockhart; Daniel K. Tarullo; Kevin M. Warsh; and Janet L. Yellen.

The FOMC statement also states that "the Federal Reserve will purchase a total of up to $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt by the end of the year. In addition, the Federal Reserve will buy up to $300 billion of Treasury securities by autumn."

In the FOMC's estimation, "the pace of economic contraction is slowing."

Link to Statement:  http://www.federalreserve.gov/newsevents/press/monetary/20090624a.htm

(ag) June 24, 2009, in Economy/Interest Rates

Judge Sotomayor: Pro-Banking or Anti-Banking?

Confirmation hearings begin July 13, 2009, for President Obama's nominee to the U.S. Supreme Court, Second Circuit Court of Appeals Judge Sonia Sotomayor.

Two significant cases give some insight:
A.  In re Visa Check/MasterMoney Antitrust Litigation, 280 F. 3d 124 (2001).  Judge Sotomayor authored the opinion in  this class action antitrust case brought by retail stores against credit card companies Visa and Mastercard.  The lawsuit alleged illegal tying based on a requirement that retailers which accepted a company's credit cards also had to accept the company's debit cards.  The District Court for the Eastern District of New York certified the class and Judge Sotomayor upheld the class certification, finding that: 

1. Retail merchants had established that their alleged overcharge theory was amenable to common proof;
2. Causation could be proven on class wide basis;
3. Individualized issues did not predominate due to associations' defense of mitigation of damages by steering;
4. The class would be manageable;
5. The district court was not required to determine which of two available techniques for measuring damages would be used before certifying class; and 
6. Certification was warranted in spite of its possible effect of coercing settlement.

Financial institutions and other businesses are usually strongly opposed to class action lawsuits because of the potential for massive damages.  This case is no exception.  The American Bankers Association opposed class certification here.  The result was a $3 Billion settlement by Visa and Mastercard.  The opinion itself, however, is dispassionate and carefully reasoned.

B.  Dabit v. Merrill Lynch, 395 F. 3d 25 (2005).  This case also involved class action claims.  The issue was whether the Securities Litigation Uniform Standards Act of 1998 (SLUSA) barred a securities fraud case from being brought in state court or whether these particular claims fell within an exclusion from the preemptive provisions of SLUSA.

Judge Sotomayor considered this case as one of first impression for the Second Circuit Court of Appeals.  SLUSA clearly preempts securities fraud actions "in connection with the purchase or sale" of covered securities.  Relying on a prior 1975 Supreme Court case, Blue Chip Stamps v. Manor Drug Stores, as well as the language of the Securities Exchange Act and Rule 10b-5, Judge Sotomayor found that these claims involving fraudulent inducement not to purchase or sell securities but rather to hold them were not barred by SLUSA from being brought in state court.

The U.S. Supreme Court overturned the Second Circuit decision at 547 U.S. 71 (2006), based on a broad policy underlying the Private Securities Litigation Reform Act (1995) and SLUSA (1998) that all class action lawsuits alleging securities fraud must be brought in federal court, with a much higher pleading standard and other restrictions designed to curb frivolous "strike" suits, rather than in state court.

Judge Sotomayor's opinion, although reversed, appears firmly grounded in statutory language and judicial precedent rather than in any ideological viewpoint in favor of class action lawsuits.

D.  Commentators have found Judge Sotomayor to be even-handed on the issue of federal preemption, ruling in favor of preemption about 50% of the time and against preemption in the other 50% of cases that have raised the issue.  LInk to article:  http://www.businessweek.com/bwdaily/dnflash/content/may2009/db20090526_819200.htm?campaign_id=rss_daily

E.  Judge Sotomayor has gained valuable experience and experience through her tenure on the Second Circuit Court of Appeals.  This is America's business court, with the greatest number of business-related cases.

F.  Financial institutions and other employers may want to examine Judge Sotomayor's employment law opinions.  That practice area, however, is not my expertise, so I leave that research to others.

Link to Law Library of Congress articles by Judge Sotomayor, as well as her two prior confirmation hearings, and other web resources:  http://www.loc.gov/law/find/sotomayor.php

(ag) June 23, 2009, in Supreme Court/General Banking

New Rules for Information Your Bank Furnishes to Credit Reporting Agencies

The Federal Banking Agencies (OCC, FDIC, OTS, FRB, NCUA) and the Federal Trade Commission will publish in the Federal Register Joint Final Rules concerning the accuracy and integrity of consumer financial information banks and other businesses furnish to credit reporting agencies. At the same time, the agencies will publish questions for possible future additions to the regulations.  All financial institutions should consider submitting comments in response. 

In 2003, Congress passed the Fair and Accurate Transactions Act ("FACTA" or the "FACT Act").  The new Final Regulations address the accuracy and integrity of information in consumer reports

The new FACTA rules also set up a framework for the consumer to communicate directly with the business that provided the information rather than having to go through the credit reporting agency to investigate and correct errors in a consumer's credit report.

Compliance Officer Alert:  Banks must adopt policies and procedures required by these new regulations.  The regs allow flexibility for the scope, size and complexity of the financial institution or business.

Link:  http://www.occ.treas.gov/ftp/release/2009-64.htm

(ag) June 22, in Credit Rating Agencies