Federalism and America's Financial Crisis

Recently, I joined the attorneys general of all the states in asking President Obama to reexamine actions by a federal agency permanently blocking states from enforcing their consumer protection laws with regard to certain financial institutions.  I am also joining a brief asking the United States Supreme Court to hear a case that permitted this agency to block state enforcement of a state law against a national bank that was violating the state law.

The Office of the Comptroller of the Currency (OCC) is the federal agency responsible for oversight of national banks. The OCC's unprecedented seizure of regulatory authority prudently exercised by the states has contributed to the current financial crisis in our nation and run roughshod over constitutional principles of federalism. 

To stop states from enforcing their own laws, the OCC relies upon the National Bank Act, which was enacted during the Civil War.  Until recently, our nation has operated under and benefited from a system that various commentators, the Supreme Court, and even the OCC itself have described as a "dual banking system."  In fact, commentators attribute the dual banking system's origins to the National Bank Act.  It would thus come as a surprise today to the drafters of the National Bank Act to learn that the OCC, pursuant to new regulations it has promulgated, uses 100-year-old National Bank Act provisions as the justification for its assault on state law.

It is important to emphasize that the OCC's action is not pursuant to recent Congressional legislation or authorization to the OCC to preempt state laws.  Even more disturbing, the OCC's preempting of state laws is not because Congress has preempted these laws.  Rather, it is the OCC's decision to promulgate some regulations that "interpret" anew provisions of the National Bank Act. 

The OCC's undermining of state authority, as a matter of law, is bad enough as a matter of state's rights, but its unprecedented action has led to unnecessary loss and harm to our country, harm that could have been avoided had the OCC allowed states to enforce their own laws.

More than five years ago, state attorneys general warned the OCC of the problems of subprime loans.  In fact, in 2003, state attorneys general traveled to Washington, D.C. to speak to the head of the OCC to warn him that lenders were pushing mortgages that were growing in risk.  The attorneys general also asked the OCC for support to deal with exorbitant interest rates and fine print fees.  The OCC dismissed these warnings and was steadfastly opposed to working with the attorneys general. 

The OCC went further by promulgating rules that block state oversight of some of the financial entities that contributed to the economic crisis.  In the process, constitutional principles of federalism -- the idea that the power to govern is shared between national and state governments -- were discarded and cast aside.  The result has been detrimental to all of us. 

Federalism is not a new idea.  It is as old as our republic.  President Thomas Jefferson, in his inaugural address, emphasized that "the most competent administrations for our domestic concerns" are state governments.  In New State Ice Co. v. Liebmann, 285 U.S. 262 (1932), Justice Louis Brandeis, in a famous dissent, noted the power of federalism and that states serve as valuable testing grounds where the people can apply social and economic policies to address individual concerns.  Said he:  "It is one of the happy incidents of the federal system that a single courageous state may, if its citizens choose, serve as a laboratory; and try novel social and economic experiments without risk to the rest of the country."  Id., at 311 (Brandeis, J., dissenting).

The OCC rejects this wisdom and experience. 

Through the years, state legislatures have enacted comprehensive consumer protection and banking laws to protect consumers from deceptive and predatory lenders, to ensure responsible mortgage lending, and to help preserve a stable financial market.  The OCC decided to preempt these laws as they applied to national banks and all of their subsidiaries.  Despite the states' warnings, the OCC pursued its preemption agenda and expanded its jurisdictional reach to levels never before seen in our country.  With preemption accomplished, the OCC is the one entity left to protect consumers from national banking improprieties.

Unfortunately, the OCC has not been up to the task.  Between 2000 and 2006, the OCC took only one enforcement action related to subprime lending, claiming that it had no evidence that "national banks are engaged in predatory and abusive lending practices to any discernable degree."  The states' warnings to the OCC were discarded and ignored.  

What recourse is available to consumers who have a complaint against a national bank or its subsidiary for violations of a state consumer protection law?  The OCC declares that it and only it has the authority to enforce that law.  Disconcerting, however, is that, since its preemption decision the, OCC has taken no steps to establish an office in Idaho, to list itself in any Idaho telephone books, or to otherwise establish a presence in Idaho.  Thus, as things stand now, Idahoans with complaints regarding national banks and their local subsidiaries have no place to go in Idaho to solve their problems.  Strangely enough, they are supposed to contact an OCC satellite office located in Houston, Texas.

Today, we are suffering the consequences of the OCC's decision to remove 50 sheriffs from the job while the mortgage lending industry became the Wild West.  Instead, the OCC opted to be the only sheriff remaining in town, at least with respect to national banks and their local subsidiaries.  In short, the OCC's actions (or inactions, as the case may be) in bank oversight and its decision to exclude states from enforcing their own laws, has translated to harm to our country.  Indeed, national banks, because of their subprime exposure, report losses of $100 billion.  More importantly, the present mortgage implosion has resulted in thousands of delinquencies and home foreclosures.   

The point of this article is to remind us, particularly our policymakers, of the benefits of government power rooted in federalism.  For several years, I have been raising this issue to the federal courts, Congress, and federal agencies.  I plan to keep pressing for Idaho's rights as a sovereign state.  Federalism is too important to abandon.

In the end, no matter how much is done to repair the present financial damage, history will repeat itself if states are shunted to the sidelines and citizens are left to rely solely upon a federal agency for protection.  Idaho has a historical interest and solid track record in protecting consumers and businesses from abusive practices in the marketplace.  I invite the federal government to allow our state to use that expertise and skill once more to protect our citizens.

Lawrence Wasden is the Attorney General of Idaho.
Recently, I joined the attorneys general of all the states in asking President Obama to reexamine actions by a federal agency permanently blocking states from enforcing their consumer protection laws with regard to certain financial institutions.  I am also joining a brief asking the United States Supreme Court to hear a case that permitted this agency to block state enforcement of a state law against a national bank that was violating the state law.

The Office of the Comptroller of the Currency (OCC) is the federal agency responsible for oversight of national banks. The OCC's unprecedented seizure of regulatory authority prudently exercised by the states has contributed to the current financial crisis in our nation and run roughshod over constitutional principles of federalism. 

To stop states from enforcing their own laws, the OCC relies upon the National Bank Act, which was enacted during the Civil War.  Until recently, our nation has operated under and benefited from a system that various commentators, the Supreme Court, and even the OCC itself have described as a "dual banking system."  In fact, commentators attribute the dual banking system's origins to the National Bank Act.  It would thus come as a surprise today to the drafters of the National Bank Act to learn that the OCC, pursuant to new regulations it has promulgated, uses 100-year-old National Bank Act provisions as the justification for its assault on state law.

It is important to emphasize that the OCC's action is not pursuant to recent Congressional legislation or authorization to the OCC to preempt state laws.  Even more disturbing, the OCC's preempting of state laws is not because Congress has preempted these laws.  Rather, it is the OCC's decision to promulgate some regulations that "interpret" anew provisions of the National Bank Act. 

The OCC's undermining of state authority, as a matter of law, is bad enough as a matter of state's rights, but its unprecedented action has led to unnecessary loss and harm to our country, harm that could have been avoided had the OCC allowed states to enforce their own laws.

More than five years ago, state attorneys general warned the OCC of the problems of subprime loans.  In fact, in 2003, state attorneys general traveled to Washington, D.C. to speak to the head of the OCC to warn him that lenders were pushing mortgages that were growing in risk.  The attorneys general also asked the OCC for support to deal with exorbitant interest rates and fine print fees.  The OCC dismissed these warnings and was steadfastly opposed to working with the attorneys general. 

The OCC went further by promulgating rules that block state oversight of some of the financial entities that contributed to the economic crisis.  In the process, constitutional principles of federalism -- the idea that the power to govern is shared between national and state governments -- were discarded and cast aside.  The result has been detrimental to all of us. 

Federalism is not a new idea.  It is as old as our republic.  President Thomas Jefferson, in his inaugural address, emphasized that "the most competent administrations for our domestic concerns" are state governments.  In New State Ice Co. v. Liebmann, 285 U.S. 262 (1932), Justice Louis Brandeis, in a famous dissent, noted the power of federalism and that states serve as valuable testing grounds where the people can apply social and economic policies to address individual concerns.  Said he:  "It is one of the happy incidents of the federal system that a single courageous state may, if its citizens choose, serve as a laboratory; and try novel social and economic experiments without risk to the rest of the country."  Id., at 311 (Brandeis, J., dissenting).

The OCC rejects this wisdom and experience. 

Through the years, state legislatures have enacted comprehensive consumer protection and banking laws to protect consumers from deceptive and predatory lenders, to ensure responsible mortgage lending, and to help preserve a stable financial market.  The OCC decided to preempt these laws as they applied to national banks and all of their subsidiaries.  Despite the states' warnings, the OCC pursued its preemption agenda and expanded its jurisdictional reach to levels never before seen in our country.  With preemption accomplished, the OCC is the one entity left to protect consumers from national banking improprieties.

Unfortunately, the OCC has not been up to the task.  Between 2000 and 2006, the OCC took only one enforcement action related to subprime lending, claiming that it had no evidence that "national banks are engaged in predatory and abusive lending practices to any discernable degree."  The states' warnings to the OCC were discarded and ignored.  

What recourse is available to consumers who have a complaint against a national bank or its subsidiary for violations of a state consumer protection law?  The OCC declares that it and only it has the authority to enforce that law.  Disconcerting, however, is that, since its preemption decision the, OCC has taken no steps to establish an office in Idaho, to list itself in any Idaho telephone books, or to otherwise establish a presence in Idaho.  Thus, as things stand now, Idahoans with complaints regarding national banks and their local subsidiaries have no place to go in Idaho to solve their problems.  Strangely enough, they are supposed to contact an OCC satellite office located in Houston, Texas.

Today, we are suffering the consequences of the OCC's decision to remove 50 sheriffs from the job while the mortgage lending industry became the Wild West.  Instead, the OCC opted to be the only sheriff remaining in town, at least with respect to national banks and their local subsidiaries.  In short, the OCC's actions (or inactions, as the case may be) in bank oversight and its decision to exclude states from enforcing their own laws, has translated to harm to our country.  Indeed, national banks, because of their subprime exposure, report losses of $100 billion.  More importantly, the present mortgage implosion has resulted in thousands of delinquencies and home foreclosures.   

The point of this article is to remind us, particularly our policymakers, of the benefits of government power rooted in federalism.  For several years, I have been raising this issue to the federal courts, Congress, and federal agencies.  I plan to keep pressing for Idaho's rights as a sovereign state.  Federalism is too important to abandon.

In the end, no matter how much is done to repair the present financial damage, history will repeat itself if states are shunted to the sidelines and citizens are left to rely solely upon a federal agency for protection.  Idaho has a historical interest and solid track record in protecting consumers and businesses from abusive practices in the marketplace.  I invite the federal government to allow our state to use that expertise and skill once more to protect our citizens.

Lawrence Wasden is the Attorney General of Idaho.