Cuomo v. Clearinghouse Assoc. May Signal A Shift In The Fight Against Unfair Bank Fees

Recent developments show that there is hope in ongoing fight to protect consumers against unfair bank fees. As I have discussed in prior posts (here and here), the National Bank Act, which was enacted after the Civil War to foster a uniform national banking system, allows national banks to pick a "home state" whose laws it will follow regarding interest rates and fees. As you would expect, banks chose the states with the friendliest laws, which allow them to get away with whatever they want, and State usury laws gradually eroded.

There was a fair amount of litigation in the 1980's and 1990's, as nineteenth century banking laws were ill-equiped to cope with twentieth century technologies such as credit cards and other electronic transactions. In 2003, the Supreme Court excplicitly held that the National Bank Act pre-empts all state usury laws, crushing challenges to unfair credit card and banking fees. Beneficial Nat. Bank v. Anderson, 539 U.S. 1 (2003). (See also Furletti, Debate Over The National Bank Act)

At the turn of the century, with state regulators out of the way and debit card use rising dramatically (particularly with small transactions), banks began earning substantial sums using a fuzzy a accounting method, resequencing daily transactions from highest to lowest in order to charge multiple overdraft fees against small transactions rather than one fee against a larger transaction. but In 2005, banks earned $10 Billion from this practice; in 2007 that number had grown to 17.5 Billion; this year, with bank accounts dwindling due to one of the worst recessions in US History, recent estimates show that banks will earn approximately 38.5 Billion in such fees. (Responsible Lending.org; Consumerist; Washington Post).

Last year, a settlement was reached in a suit against the nation's largest bank, Bank of America, in an action in California State Court under California's consumer protection laws. I recommended the drop-in-the-bucket $35 Million settlement because, the way the law stood at the time, the bank had a very strong argument for having the suit dismissed outright.

Now, there is some hope that the legal landscape may be shifting. On June 29, 2009, the US Supreme Court issued its decision in Cuomo v. Clearinghouse Association, wherein it permitted an investigation of bank lending practices by state attorneys general to determine whether the banks had violated state fair lending laws.

Throughout the sub-prime lending crisis, the states were reluctant to act because, the way the National Bank Act had been interpreted, they were powerless to regulate national banks. (See Law Prof. Blog). After the sub-prime bubble burst, however, many states, including New York, launched investigations into the banks lending practices. As expected, the banks refused to cooperate and argued that the National Bank Act allows them to be regulated 0nly by the Federal Government's Office of the Comptroller of Currency (with whom they have a cushy relationship) and their home state.

Initially, the Courts sided with the banks. The US District Court for the Southern District of New York entered an injunction, halting the States' investigations, and the Second Circuit affirmed. The Supreme Court, however, in a surprise decision, overturned the lower court and found that the States had the power to enforce their fair lending laws against national banks.

The reason this is great for consumers is that, by overturning the injunction, the Supreme Court limited the pre-emptive effect of the National Banking Act. By allowing state attorney generals to pursue a fair lending law investigation against the banks, it opens the door (slightly) for state suits based upon unfair and deceptive practices and similar consumer protection statutes.

Unfair overdraft fees are also one of the issues that will be addressed by the Obama administration's new Consumer Protection Agency. Some economists have suggested that "micromanagement" and increased federal involvement is not the answer, and I tend to agree. (Becker-Posner Blog). Indeed, the problem was already made substantially worse by the Federal Government's prior attempts at nationalization through the National Banking Act. Changing the name of the Office of the Comptroller of Currency will not fix the fact that it has not done its job for decades; and even if there is improvement, a new administration could easily wipe out that improvement.

In my opinion, one of the lessons to be learned from the mortgage crisis is that all-encompasing Federal control can lead to all-encompasing failures. The Obama Administration's consumer protection agency is a great idea, but it can only achieve sustainable change if pre-emption is reduced in these areas. State law usury and deceptive practice claims should be permitted to co-exist with federal regulation.