PETER O. ZIERLEIN*
On June 29 the Supreme Court ruled that states can enforce fair lending and consumer protection laws against national banks, overturning lower-court decisions holding that this authority belonged to federal regulators. The case, Cuomo v. Clearing House, originated in 2005 with an investigation by then-New York Attorney General Eliot Spitzer into high rates of subprime lending in black and Hispanic communities. Spitzer had found what he called “troubling” disparities in Federal Reserve data between the mortgage rates charged to minorities and those charged to white borrowers, and he sent letters to a number of national banks, including Citigroup and JPMorgan Chase, requesting information about their lending practices. The Clearing House Association, a trade group representing the issuers, sued to block Spitzer’s request, maintaining that it was subject to oversight by the federal Office of the Comptroller of the Currency and not state law. The Supreme Court decided otherwise, in what civil and economic rights advocates are calling an important victory for consumer protection.
This case hinges on a Republic-old question of federalism–the balance of state and federal power in law enforcement. Spitzer’s activism exemplifies what some have called progressive federalism–states stepping into the regulatory void left by reticent federal agencies. This kind of local muscle-flexing is not limited to the legal sphere. In recent years states have also taken the lead in providing vital social services in response to federal retrenchment on critical safety-net programs. But times have changed. In this recession, while states can still play a central law enforcement role, they are in such dire financial straits that they lack the resources to meet the surge in basic human needs and have reached the limits of what could be called safety-net federalism. In this fiscal emergency the Obama administration must take up the slack, with more leadership and more federal dollars. The $787 billion stimulus package began to shore up flagging state efforts, but much more needs to be done.
Clearing House underscores the importance of regulatory federalism in hard times. The conditions that prompted Spitzer’s initial investigation–disproportionately high rates of subprime lending to blacks and Hispanics–have only worsened into foreclosures. The New York Times reported in May that in its own metropolitan region, defaults in predominantly minority census tracts are three times those in mostly white ones; in 85 percent of the most foreclosure-afflicted communities a majority of homeowners are black or Hispanic, reversing recent and important gains in homeownership in those communities. New findings from the Pew Research Center show similar data nationwide.
Behind these statistics, and antiseptic words like “pre-emption” and “devolution,” are the real-life stories–names, faces, evictions, anxious children–of poor people caught in the economic storm. Consider Olive Thompson, a 45-year-old nursing assistant, homeowner and single mother of four who was forced into bankruptcy, depleted her 401(k) and lost her job. When the payments on her adjustable-rate mortgage jumped, she lost her home, too. “It’s horrible,” Thompson told the Times. “I don’t know where I’m going.” Like so many others, Thompson is suffering the twin ravages of anemic regulation–allowing high-interest and possibly predatory subprime mortgages–and deep recession brought on by the collapse of banks that backed these loans in the first place. Current federal efforts to improve oversight of the financial services sector were anticipated and prodded by New York’s vigilance. Going forward, the states must continue to push the federal government to share in this watchdog role.