EXECUTIVE WATCH

By William P. Marshall

On January 26, 2009, less than one week after taking office, President Obama, directed the Environmental Protection Agency to reconsider a Bush-era decision that prevented California and other states from setting stricter limits on auto emissions than that required by the federal government. As a matter of environmental policy, the decision was not surprising. Environmentalists had long argued for this change and candidate Obama promised during the 2008 campaign that he would take this action if elected. And, without doubt, the auto emissions decision was a significant environmental policy decision signaling that the new Administration would be vigorous in pursuing environmental protection.

Some observers, however, also saw this action as potentially having import beyond environmental policy. Specifically, it was suggested that this action might herald a new era of federal-state relations in which the federal government would be more hospitable to state regulatory efforts. The Bush Administration had not been so welcoming. Not only had the Bush Administration pursued a decidedly laissez-faire approach to is own regulation (non-regulation?) of business practices, it had also gone out of its way to attempt to pre-empt state regulatory efforts through its administrative actions and its support for legislative proposals designed to curb state authority.

The states, however, proved resilient and endeavored to take on an increased role in guarding the public against business abuses while the federal government remained asleep at the wheel. It was the states, for example, and not the federal government, that led the first regulatory efforts against predatory lending, and it was the states that first identified, and first started to combat, the mortgage crisis brought on by sub-prime lending. Many of these actions proved successful and settlements were reached with financial companies such as Countrywide Financial, for example, that provided substantial tangible relief to distressed debtors.

The question for the first 100 days of the Obama Administration then was how the new more pro-regulatory federal regime would react to state enforcement initiatives? Would the new Administration foster complementary state efforts to protect consumers and the environment? Or, believing that the reigns of regulation were now in the hands of regulators who finally cared about the constituencies they served, would the new Administration attempt to centralize enforcement prerogatives in federal authorities alone? The auto emissions decisions sent a strong signal in favor of the former course.

Events since that time, however, have been less clear. Consider, for example, the Obama Administration’s position in Cuomo v. Clearing House Association, a case currently awaiting decision before the United States Supreme Court. Cuomo arose after the New York Attorney General’s Office reviewed home mortgage data released by the Federal Reserve which indicated that a disproportionately high percentage of high-interest home mortgage loans had been issued to minorities. Seeking to determine whether the lending practices of various New York banks violated consumer protection and/or anti-discrimination laws, the Attorney General sent preliminary “letters of inquiry” asking state and national banks to provide him with additional information. The Clearing House Association (CHA), a consortium of national banks, and the Office of the Controller of the Currency (OCC) responded by bringing separate suits (later consolidated) against the state Attorney General, seeking to enjoin him from issuing formal subpoenas. CHA’s and OCC’s lawsuits were based on 12 C.F.R. § 7.4000, promulgated by the OCC in 2004 under the Bush Administration, which prohibits state officials from examining or inspecting a bank’s records and/or enforcing compliance with any federal or state laws. The OCC’s ostensible authority for enacting this regulation was its interpretation of the term visitorial power in Section 484 of the National Bank Act’s requirement that “[n]o national bank shall be subject to any visitorial powers except as authorized by Federal law” to include the examination or inspection bank records in an enforcement proceeding. The question raised in Cuomo is whether the OCC’s interpretation of visitorial power against the exercise of the state’s investigative authority is valid, and relatedly, whether this interpretation is entitled to Chevron deference. The Bush Administration’s position, not surprisingly, was that the OCC’s interpretation pre-empting state enforcement was authorized by Section 484.

Significantly, and perhaps disappointingly, the Obama Administration continued to adhere to the Bush Administration’s position. This is troubling in two respects. First, the result of immunizing the banks from the type of investigation initiated by the New York Attorney General in Cuomo is problematic. The OCC does not have the capabilities of the state attorneys general to pursue actions of this type and the banks could not claim that they would be subject to inconsistent regulatory schemes if the state officials were limited to proceeding only against malfeasance that occurred with their jurisdictions. Second, the Bush Administration’s argument that an agency is entitled to Chevron deference when it seeks to pre-empt state authority is a serious intrusion into state authority. As New York argued in its briefs, such pre-emption should at least require explicit Congressional authorization.

At one level, I suppose, the Obama Administration’s decision to stay the course in Cuomo may be understandable. Incoming Administration’s often are reluctant to change the litigation position of the previous Administration and that may have been the key consideration at issue here.

But state authorities often bring new ideas and new energy to regulatory problems. And although one can understand the desire of a presidential administration to have a regulatory field all to itself without the problems that can be created by competing and overlapping investigations by the states, the Obama Administration should also recognize that its time at the regulatory helm is limited and the Nation may again face a moment where another Administration decides to forego regulatory action and the only enforcement authorities left to fight corporate excesses are the states.