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THE SUPREME COURT MAY GIVE US ANOTHER 2008 FINANCIAL CRISIS  
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Katya Schwenk
April 2, 2024
The Lever
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_ A new case could decimate state-level consumer protections against
predatory banking practices. _

, (AP Photo/Chris Carlson)

 

The United States Supreme Court
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case that could decimate consumer protections against abusive banking
practices — potentially allowing banks to disregard state laws meant
to prevent the kind of predatory lending that led to the 2008
financial crisis.

Legal experts say that the case, _Cantero v. Bank of America_
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could invalidate a host of state laws that protect people from
predatory lending, junk fees, and other financial scams. The case is
ostensibly about a New York statute that forces banks to pay interest
to consumers on certain mortgage accounts — but big banks are
fighting for the court to rule they are exempt from that law and many
others in states across America.

The banking lobby has thrown its weight behind
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case alongside corporate-backed conservative legal groups and the U.S.
Chamber of Commerce, a powerful business trade group, all of whom have
filed briefs supporting Bank of America. Supreme Court justices heard
arguments
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the case in February, and a ruling is expected potentially in a matter
of weeks.

A ruling in favor of the big banks could “completely undermine the
notion that the states can exercise meaningful regulation over
essentially any banks,” said Arthur Wilmarth, a professor emeritus
at the George Washington School of Law who helped write an amicus
brief
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behalf of the Conference of State Bank Supervisors, an association of
state bank regulators, opposing the banking lobby’s position.

“To me, that would return us to where we were in 2004,” Wilmarth
said, when states were “essentially hamstrung and undermined in
their ability to protect consumers and stop all of this bad
lending.” Ultimately, that unchecked predatory lending sent the
global economy into a tailspin over a decade ago.

If the Supreme Court decides to rule broadly in favor of the banks, as
a lower court did on appeal, major national banks could argue that
they would not have to comply with state laws that affect a broad
range of banking practices. That could render unenforceable the laws
that protect consumers from excessive overdraft fees
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limits on exploitative payday loans
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or prohibit banks from engaging in other abusive practices.

“The States’ authority to regulate financial institutions and
protect consumers faces a grave threat,” wrote the Conference of
State Bank Supervisors in its amicus brief
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the case. A decision in favor of the banking lobby, they wrote,
“would create a financial marketplace dominated by national banks
and severely impair the States’ ability to protect their residents
from fraudulent and abusive financial practices.”

States have often been at the forefront of the fight against predatory
banking practices, stepping in when federal regulators have failed to
do so.

The case will determine whether “the power of states to make rules
that protect their residents apply to national banks,” said Smita
Ghosh, an attorney at the legal think tank Constitutional
Accountability Center, which has filed an amicus brief in the case
opposing Bank of America’s position.

When the nine Supreme Court justices heard the case and questioned
attorneys for both sides in February, their opinions appeared split
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making it difficult to predict the outcome — meaning that a ruling
in the banking lobby’s favor is plausible. 

“There’s going to be a division,” Wilmarth said. “It worries
me a great deal.”

Big Banks Intervene

The _Cantero _case began in 2018 when Alex Cantero, a homeowner in
New York City, filed a class-action lawsuit against Bank of America.
Like most people with a mortgage, Cantero made an extra payment each
month that was placed in a mortgage escrow account with Bank of
America. The bank holds this money and uses it to pay property taxes
and insurance, ensuring homeowners don’t miss those other payments.

A decades-old New York state law
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banks in the state to pay two percent interest on the money in
mortgage escrow funds. But Bank of America was not paying Cantero —
or anyone else — interest on the money sitting in escrow. When
Cantero failed to receive interest payments from the bank, he sued.

By some estimates, Bank of America has robbed consumers of tens of
millions of dollars
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the years by failing to pay this interest in other jurisdictions.

“Although the banking industry keeps trying to say that the states
are trying to impose some terrible burden on them, in fact these
escrow accounts serve their interest and are beneficial to them,”
Wilmarth said. It’s in lenders’ interest that homeowners pay their
taxes on time — and therefore, it’s in their interest to require
escrow payments, he said. 

“Obviously, the lender doesn’t want a tax lien put on the
property,” he noted.

Bank of America, however, contends that it should be exempted from New
York’s law. 

Bank of America — and the banking lobby — argue that the National
Bank Act of 1864, the federal legislation underpinning the U.S.
banking system, exempts national banks like Bank of America —
institutions chartered by the federal government — from New York’s
interest law. They say the National Bank Act exempts national banks
from all kinds of state banking regulations.

Banks claim
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National Bank Act was intended to protect national banks from too much
interference by state regulators, and a ruling against Bank of America
in _Cantero _would “subject national banks to a patchwork of 50
State laws,” undermining stability in the industry.

A litany of trade groups representing the banking industry — the
American Bankers Association, the Consumer Bankers Association, the
Mortgage Bankers Association, and the Mid-Size Bank Coalition of
America, among others — have filed amicus briefs
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this position. So have the Washington Legal Foundation, a legal think
tank backed by Big Oil
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the Bank Policy Institute, the banking industry’s policy and
lobbying arm
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and the U.S. Chamber of Commerce.

All wield significant influence in Washington; the American Bankers
Association, big banks’ largest trade group, spent $8.3 million
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in 2023. Lobbying by big banks last year, _Reuters_ found in
February
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reached its highest level since 2008.

With support from the banking lobby, Cantero’s case wound through
the courts for years and eventually worked its way up to the U.S.
Court of Appeals for the Second Circuit. The appellate court
overturned a prior opinion and sided with Bank of America —
issuing a broad ruling
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contended that national banks were largely exempt from state banking
laws.

Judges at the Second Circuit argued in the opinion
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national banks are exempt from state laws that “exert control over a
banking power granted by the federal government.”

“If you took that language seriously, it would seem to say that
states can’t do anything. That they have no right to put any
regulations on any national bank,” Wilmarth said. “[The opinion]
was completely sweeping in its tone.”

The Court of Appeals for the Ninth Circuit disagreed with
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Second Circuit’s opinion in a separate case
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Bank of America over a nearly identical California law, which created
opposing rulings on the issue. Now, the high court is considering how
to resolve the disagreement — and whether to adopt the same sort of
broad preemptions for banks as the lower court did.

“Foreclosures Were Spiking”

Mortgage escrows and state banking regulation may seem abstract
— but ensuring that state officials can take on big banks has been
an essential focus for consumer protection advocates for decades.

Adam Rust, the director of financial services at the Consumer
Federation of America, can testify to that. In the years preceding the
2008 financial crisis — as banks issued riskier and riskier mortgage
loans, eventually plunging into default — Rust watched as states
attempted to address predatory lending, and were repeatedly foiled by
big banks like JPMorgan and Citigroup.

In 1999, North Carolina became one of the first states
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pass a law addressing predatory lending practices by banks, which
trapped low-income or vulnerable homebuyers in high-cost mortgages.
Other states soon followed
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But at the time, banks adopted the same argument that Bank of America
is adopting in the _Cantero _case: Federal law exempted them from
complying with this kind of state regulation.

“I remember how frustrating it was to have a well-crafted state
predatory lending law in North Carolina and then to experience banks
fleeing to accommodative national regulators to evade it,” Rust
said. 

Banks had a friend in the Office of the Comptroller of the Currency
(OCC), a federal agency that oversees the national banking system.
Critics have argued that because the OCC is funded almost entirely
through
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it levies on national banks, the agency is hardly an independent
authority.

“This is an agency that is completely captured by the big national
banks,” Wilmarth said. “It has every interest to go easy on
[banks], to encourage their ability to get bigger, and thereby collect
more fees.”

OCC’s troubling role in the years preceding the global financial
crisis is well documented
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pushed for banks to be exempted from state regulations like the North
Carolina law. The agency issued sweeping rules in 2004
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declaring national banks exempt from a wide range of state laws.
Thanks in part to such deregulation, predatory lending quickly
spiraled out of control.

“[The OCC] was saying that applying sensible consumer protections,
whose entire purpose was only to prevent foreclosures, obstructed the
ability of national banks to exercise their powers granted under
federal law,” Rust said. And all the while, he said, “foreclosures
were spiking.”

Wilmarth echoed Rust’s sentiments. “What the OCC did basically was
to preempt all the state laws that they could between the 1990s and
2000s, particularly in their 2004 rule,” he said. 

“Many people, me included, think these sweeping preemption rules
essentially disabled the states from both establishing and enforcing
meaningful consumer protections.”

What followed was the total devastation of the financial crisis, in
which millions lost their homes
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and one in five workers lost their jobs
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plunging into poverty.

In 2010, shocked by the devastation wreaked by the subprime lending
crisis, lawmakers passed
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Dodd-Frank Wall Street Reform and Consumer Protection Act, a landmark
set of reforms to help hold big banks to account. In Dodd-Frank,
lawmakers specifically considered whether or not banks should be
exempt from state regulations. They decided to narrow the standard,
writing in the law that national banks should only be spared from laws
that “prevent or significantly interfere with a national bank’s
exercise of its powers.”

Yet the OCC appeared reluctant to adhere to the new requirements,
issuing revised regulations in 2011 that still preserved broad
guidance on preemption. Consumer protection advocates have argued
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the OCC’s 2011 rules fell far short of the standard lawmakers had
mandated in Dodd-Frank. 

While the OCC itself has not formally weighed in on
the _Cantero _case, a coalition of former OCC leaders and senior
officials filed an amicus brief
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the case in January in favor of Bank of America — a split from
Biden’s Justice Department and other federal agencies that raised
eyebrows
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The OCC officials sided staunchly with the banking lobby and chided
the Justice Department for its position. 

“State law cannot control or hinder national banks’ activity in
real estate lending generally,” OCC officials wrote in the brief. 

However, consumer advocates believe that state regulation plays a
critical role in banking — because state officials have sometimes
taken a more hands-on approach to regulation than the OCC.
Furthermore, as consumer advocates noted in their brief on _Cantero_,
states are “often able to respond to problems that arise sooner than
the federal government.”

A ruling from the high court is expected in the coming weeks as the
justices continue to deliberate on the case — and decide whether to
side with the banking lobby or consumer interests.

_Katya Schwenk is a journalist based in Phoenix, Arizona._

* predatory lending
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* U.S. Supreme Court
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* consumer protection
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