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COPYRIGHT 2006 Harvard Society for Law and Public Policy, Inc.
Recent regulations promulgated by the Office of the Comptroller of the Currency assert a sweeping authority to preempt a broad array of state laws, including consumer protection laws, applicable not only to national banks but also to their state-chartered operating subsidiaries. The regulations threaten both to disrupt state efforts to combat predatory lending and other abusive practices and to interfere with a state's sovereign authority over corporations chartered under its laws. Yet federal courts reviewing these initiatives have failed to devote any substantial analysis to challenges based on the Tenth Amendment. That failure is likely a consequence of the lack of any substantial doctrinal base in Tenth Amendment jurisprudence. This Article first explores the legal and policy implications of the preemption program and identifies the consumer protection interests at stake and the States' role in vindicating those interests. It then considers the importance of judicial review to the Framers' federalism design and endeavors to distill from their commentary and debates some substantive content for the Tenth Amendment that federal courts could credibly enforce. The Article concludes by suggesting a template for doctrinal analysis of Tenth Amendment issues arising from federal administrative action.
INTRODUCTION
After a promising start in life with the pedigree of the original Bill of Rights, the Tenth Amendment (1) fell into disrepute because of its role in the legal apparatus of racial discrimination. (2) It has since been alternatively dismissed as constitutional surplusage--a mere "truism" (3)--and honored as an "independent font of sovereignty." (4) In its periodic bouts with the commerce power, the Tenth Amendment has escaped precise or consistent analysis of its substantive content. It has been characterized as a "flimsy aid in withstanding federal power," (5) a "limit[] upon the power of Congress to override state sovereignty, even when exercising its otherwise plenary powers to tax or to regulate commerce," (6) a "thinly veiled rationalization" for judicial second-guessing of Congress's policy choices, (7) a "tautology" (that is, any powers reserved to the States are self-evidently a limitation on Congress's Article I enumerated powers), (8) a "misguided doctrine," (9) the basis for a "counter insurgency," (10) playing an "integral role ... in our constitutional theory," (11) and a "constitutional frog that turned into a prince ... [and] back into a frog." (12)
Federal intervention into the domain of commercial activities traditionally regulated by the States poses "perhaps our oldest question of constitutional law," (13) namely, the appropriate spheres of the sovereign authority of the federal and state governments and the proper relationship between them under our constitutional scheme. It also exposes the uneasy tension between the Commerce Clause (14) and the Tenth Amendment that has persisted for over 200 years of constitutional jurisprudence. Apart from the superficial clarity provided by cases such as New York v. United States (15) and Printz v. United States, (16) which bar congressional exercise of the commerce power in a manner that would "commandeer" state legislatures or executive branch officials, Tenth Amendment jurisprudence remains chaotic, conflicting, and rather rudimentary. It is astonishing that the meaning of a single declarative sentence enshrined in the Bill of Rights has evaded judicial construction establishing, at a minimum, some bedrock level of state sovereignty upon which the federal government cannot impinge.
In a previous decision, also named New York v. United States, the Court upheld the constitutionality of federal taxes on New York's sale of mineral waters from a spa in Saratoga Springs notwithstanding the state's claim that it was exercising an "essential government function." (17) That line of argument would not come to fruition until thirty years later in National League of Cities v. Usery, (18) a decision widely regarded as part of the agenda of a "conservative" jurist, then-Associate Justice William H. Rehnquist. (19) Yet it was Justice William O. Douglas, a liberal progressive, whose strident dissent in New York decried the "power to tax is the power to destroy" effect of the majority opinion, like McCulloch v. Maryland (20) in reverse, and dismissed the notion that a process-based approach (21) could ever be adequate to vindicate Tenth Amendment concerns:
The notion that the sovereign position of the States must find its protection in the will of a transient majority of Congress is foreign to and a negation of our constitutional system.... ... The Constitution is a compact between sovereigns. The power of one sovereign to tax another is an innovation so startling as to require explicit authority if it is to be allowed. If the power of the federal government to tax the States is conceded, the reserved power of the States guaranteed by the Tenth Amendment does not give them the independence which they have always been assumed to have. They are relegated to a more servile status.... They must pay the federal government for the privilege of exercising the powers of sovereignty guaranteed them by the Constitution. (22)
The particular federal intervention providing the impetus for this Article is the assertion by the Office of the Comptroller of the Currency (OCC) of sweeping authority to preempt a broad array of state laws of the sort that have for 150 years applied to the activities of national banks and coexisted with the provisions of the National Bank Act. (23) Early in 2004, OCC, embroidering rather liberally upon a concept from the Supreme Court's decision in Barnett Banks of Marion County v. Nelson, (24) promulgated regulations purporting to preempt all state laws that "obstruct, impair, or condition a national bank's ability to fully exercise" its federally granted powers. (25) Even more controversially, the preemption applies whether a national bank exercises such powers directly or through one or more state-chartered operating subsidiaries. (26)
At the same time, OCC has promulgated regulations giving an expansive interpretation to its visitorial powers under 12 U.S.C. [section] 484(a). (27) Pursuant to that interpretation, OCC claims exclusive and discretionary authority to investigate potential violations of federal or state law not only by national banks but also by their state-chartered operating subsidiaries and to bring enforcement actions to redress any such violations. (28) OCC contests the authority of state law enforcement officials to commence litigation to enforce compliance with state laws and with those federal laws that Congress has empowered state officials to enforce, even where OCC itself has declined to act. (29) Thus, even with respect to operating subsidiaries, which are organized solely under state law, OCC denies that state officials may exercise their law enforcement powers or even their subpoena authority. (30)
After briefly summarizing the consumer protection interests at stake and the role of the States in vindicating those interests, Part I of this Article highlights some of the more problematic aspects of OCC's Preemption Regulations and Visitorial Powers Regulations, and considers appropriate limitations on the powers of national bank operating subsidiaries. (31) Part II considers the importance of judicial review to the Framers' federalism design and discusses what can be distilled from their views about the substantive content of the Tenth Amendment. Part III presents a modest suggested template for doctrinal analysis of Tenth Amendment issues.
I
A. Predatory Lending and OCC's Inadequate Response
Predatory lending, a despicable practice usually involving manipulative sales tactics, vulnerable borrowers, high credit costs, and outrageous terms, has become prevalent in the United States. Common lending practices that have come to be characterized as "predatory" include equity stripping, (32) loan flipping, (33) hidden balloon payments, (34) "packing" or "padding," (35) high-cost payday lending, (36) "back-end" profiteering, (37) and other artifices (38) ranging from common exploitation to outright discrimination. (39) A recent attempt to define predatory lending has characterized it as a congeries of abusive loan terms or practices featuring one or more of the following: "(1) loans structured to result in seriously disproportionate net harm to borrowers; (2) harmful rent seeking; (3) loans involving fraud or deceptive practices; (4) other forms of lack of transparency ... that are not actionable as fraud; and (5) loans that require borrowers to waive meaningful legal redress." (40)
Prominent among the broad spectrum of lenders that engage in these practices are national banks, acting either directly or indirectly (through affiliates or contractual arrangements such as "charter renting"). (41) Three brief examples of predatory lending should suffice, courtesy of the State of New York. The first involves a seventy-two-year-old woman identified as "Mrs. N.," who lived in the same residence in Elmhurst, Queens for more than thirty years and who was induced by a broker to refinance her existing 9% mortgage because she had a $2,200 tax lien on her property. Mrs. N. ended up with a $105,000 loan from an operating subsidiary of a national bank based in the Midwest that ultimately raised her effective interest rate to 10.5% and increased her monthly payment by nearly $2,000. Worse, her new loan was no longer a fixed rate mortgage but was instead an adjustable rate mortgage under which her effective interest rate could climb to 16.375%:
Mrs. N.'s new monthly payments comprise 67 percent of her monthly income from Social Security and pension. Her sole benefit from the refinance was the payoff of the tax lien, which she could have satisfied with direct payments to the New York City Department of Finance through an affordable payment plan. Instead, the refinance cost her nearly $11,000 in closing costs (including more than $4,000 in fees), increased her monthly payments to an unaffordable level and put her at risk of foreclosure. (42)
The second example involves a sixty-eight-year-old man, identified as "Mr. M.," who had resided in Brooklyn for more than twenty years and had been forced to retire from the U.S. Postal Service after twenty-five years. Made desperate when the reduction in income caused him to fall behind in mortgage payments, he sought to refinance with an operating subsidiary of a national bank:
The op-sub refinanced his $98,000 mortgage balance into a $135,000 loan, which increased his monthly payments by more than $500. They urged him to refinance his [mounting] credit card debt into the new mortgage, telling him that it would decrease his monthly debt.... Unknown to Mr. M., the loan also included a broker's fee. Mr. and Mrs. M.'s joint monthly income at the time of the loan was only about $1,800. The lender made them a loan with monthly payments of $1,367, not including taxes and insurance. When Mr. M. expressed concern about the amount of the monthly payments, he was told that he could refinance at a lower rate if he made his payments on time for a year. The op-sub's loan file contained an unverified falsified lease for $900 a month with the name of a nonexistent tenant. Mr. M's signature on the lease had been forged. (43)
The final example involves a lawsuit by the New York Attorney General against the purchaser of a mortgage loan, First Horizon Home Loan Corporation, a Texas-chartered operating subsidiary of First Tennessee Bank, N.A. The loan amount was $27,000 at 8.5% interest, payable over a 25-year term at $201.31 per month. The borrower had made all payments due under the loan, and after First Horizon acquired the loan, payments were made by automatic debit from his checking account. First Horizon continued to debit the account for nearly four years after the loan was paid in full thereby overcharging by $9,461.57. When the borrower brought this to First Horizon's attention, it only then notified him that an error made by the loan originator in 1974 had resulted in a $16 per month underpayment and that the maturity date of the mortgage would be unilaterally extended to 2010, thus requiring him to pay an additional $25,163.75. When the borrower, who had already overpaid, stopped the automatic debits, First Horizon threatened to foreclose on his home if he did not pay $12,320.49 within thirty days. After unsuccessful attempts by the borrower's attorney to resolve the matter amicably, the Attorney General's office became involved. First Horizon responded that, as an operating subsidiary of a national bank, it could not discuss the matter because its sole regulator was OCC, which had issued a directive advising First Horizon not to talk to state attorneys general. (44)
This is not to suggest that OCC encourages or even condones predatory lending. Quite the contrary, OCC has issued two advisory letters, one on loan originations (45) and another on purchased loans, (46) and the former Comptroller delivered several speeches on this and related subjects. (47) All this guidance and exhortation, however, is directed more toward legal, reputational, and other risks, including credit risk in cases where only the liquidation value of the collateral, rather than the borrower's ability to repay, justifies making the loan--in other words, bank safety and soundness issues--than toward consumer protection per se. The only actual regulatory prohibitions that OCC has promulgated are against making real estate loans "based predominantly on the bank's realization of the foreclosure or liquidation value of the borrower's collateral, without regard to the borrower's ability to repay the loan according to its terms" (that is, prohibiting equity stripping), (48) and against engaging in "unfair or deceptive trade practices within the meaning of section 5 of the Federal Trade Commission Act" and the implementing regulations of the FTC. (49) The latter is rather a hollow gesture given that, as OCC freely admits, it took OCC and the other federal banking agencies "more than twenty-five years to reach consensus on their authority to enforce the FTC Act." (50) Even more disingenuous is OCC's in sincere lament that it lacks particularized rulemaking authority to define specific practices as unfair or deceptive (51) and is thus unable to proscribe, under that rubric, notorious practices such as loan flipping or equity stripping. (52) OCC has yet to explain, however, why it could not use its ample enforcement authority under section 8 of the Federal Deposit Insurance Act (53) to proscribe those practices as "unsafe or unsound banking practices" (54) and to work with the FTC and the Federal Reserve Board to develop the requisite interpretations that would identify those practices as "violations of law" sanctionable under the Act. (55)
B. OCC's Preemption and Visitorial Powers Regulations
In the Preemption Regulations, OCC takes the position that it may except in two situations proscribe the application of all state laws to national banks. The first exception consists of those relatively few provisions of the National Bank Act (56) or other financial regulatory statutes (57) in which Congress expressly incorporates state law standards. The statutes comprising this "exception" are more properly categorized as affirmative reverse preemption regimes, which OCC has no discretion to alter, though its track record of attempts at creative evasion is well established. (58) The second exception is for individual state laws (or, where appropriate, types of state laws) that OCC says it may, from time to time and solely within its own discretion, determine to have only an "incidental" effect on national banks. To be appropriately "incidental," the state laws in question must be part of "the legal infrastructure that makes it practicable" for national banks to conduct their federally authorized activities and "not regulate the manner or content of the business of banking authorized for national banks." (59)
In a companion rulemaking to the Preemption Regulations, OCC amended its regulations governing the exercise of "visitorial powers" over national banks to prohibit state officials from filing suit (whether in federal or state court) to enjoin national banks to comply with state laws, leaving declaratory relief the only available remedy. (60) Even armed with a court-issued declaratory judgment, state officials may not, OCC maintains, take any action other than notifying OCC, which retains sole discretion over whether to enforce that state law against the national bank. (61)
The new regulations codify positions that OCC has previously taken to preempt state predatory lending laws. (62) For example, the preamble to the Preemption Regulations explains the policy basis for OCC's contention that state lending laws should, in general, be preempted. "Markets for credit (both consumer and commercial ... are now national, if not international, in scope," and "the elimination of legal and other barriers to interstate banking ... has led a number of banking organizations to operate ... on a multi-state or nationwide basis." (63) The agency therefore regards it as imperative that national banks be "enable[d] ... to operate to the full extent of their powers under Federal law, without interference from inconsistent state laws, consistent with the national character of the national banking system." (64)
OCC has enjoyed phenomenal success with these theories in recent litigation. The agency has won or participated successfully in cases brought by national banks in several scenarios: preempting a Texas "par value" statute prohibiting banks in Texas, including national banks, from charging check-cashing fees to non-customers; (65) preempting a similar Georgia check-cashing fee law, (66) preempting a municipal ordinance prohibiting banks from charging ATM fees; (67) and preempting, as to federally chartered credit card issuers, a California law imposing consumer protection disclosure requirements for credit card accounts. (68) Similarly, on the visitorial powers issue, OCC has prevailed as intervenor or amicus curiae in several cases in which state authorities were enjoined from regulating mortgage banking operating subsidiaries of national banks. (69)
In none of these cases was the Tenth Amendment paid more than lip service. Instead, the courts have bought into a simplistic "tautology" approach: (70) because there is no "commandeering," and because banking is clearly commerce that falls within the powers granted to Congress, there is no Tenth Amendment interest of the States to protect. (71)
Such an approach glosses over the fact that it is to Congress, and not to a bureau within the Treasury Department, that the Supremacy Clause of the Constitution (72) expressly grants the power to preempt state law. Preemption occurs (73) when Congress, in enacting a federal statute, evinces a clear intent to preempt state law; (74) when there is outright or actual conflict between federal and state law; (75) when compliance with both federal and state law is impossible; (76) when there is implicit in federal law a barrier to state regulation; (77) when Congress has legislated comprehensively, thus occupying an entire field of regulation and leaving no room for the States to supplement federal law; (78) or when state law stands as an obstacle to the accomplishment and execution of the full objectives of Congress. (79) None of these is applicable to the situation at hand.
Preemption may result from action taken by a federal agency, but only where the agency is acting within the scope of its congressionally delegated authority. (80) There is no reason to believe that is the case here. Even if OCC had authority to act, the critical question in any preemption analysis would still remain whether Congress has unmistakably indicated that federal regulation supersedes state law. (81) This Part will demonstrate that Congress has taken a very different position on the dual banking system in general and on state consumer protection laws in particular. However, a few observations about the legal and policy underpinnings of the Preemption Regulations and the Visitorial Powers Regulations are appropriate beforehand.
First, it bears repeating that the initial exception noted by OCC to its regulatory powers is not really an exception at all. It is part of the statutory landscape that created OCC in the first place and by which it is bound. OCC learned this lesson with respect to the branching authorization added in 1927 by an amendment to the National Bank Act known as the McFadden Act. (82) That amendment, as part of a congressional policy of "competitive equality," specifically tied the branching power of a national bank in a given state to what state law permitted for state-chartered banks. When OCC nevertheless approved branch applications by two national banks in Utah at locations where state banks were forbidden by state law to branch, the Supreme Court invalidated the approvals in no uncertain terms. (83) OCC's position was that if Utah authorized banks to branch at all, OCC was free to ignore any statutory conditions imposed by the state legislature and authorize branching by national banks, even in a manner that violated those conditions. (84) The Court disagreed: "It is a strange argument that permits one to pick and choose what portion of the law binds him." (85) Only after several more judicial decisions invalidated administrative attempts to make an end-run around state branching restrictions (86) did OCC back down.
Second, the language of the Preemption Regulations, while reminiscent of that used by the Supreme Court in Barnett Banks of Marion County v. Nelson, (87) is significantly different and more expansive. (88) In Barnett, Florida insurance regulators challenged insurance sales by Barnett Bank, a national bank pursuant to 12 U.S.C. [section] 92. The principal legal issue was whether Florida's anti-affiliation law, (89) which prohibited sales of insurance by banks and their subsidiaries, affiliates, and employees (90) was preempted by the so-called "town of 5,000" statute, 12 U.S.C. [section] 92. This was not a typical preemption case, however, as it involved insurance regulation and the special "reverse preemption" regime enacted by Congress in the 1940s in the McCarran-Ferguson Act. (91) Under that regime, general-purpose federal statutes that happen to cause or encounter some interference or conflict with state insurance laws do not preempt those laws but are themselves preempted. (92) If, however, the federal statute "specifically relates to the business of insurance," then the reverse preemption rule is inapplicable and normal preemption analysis applies. (93)
The precise contours...
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