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Obama Sides With Banks Accused of Racism

The administration defends lenders that allegedly bilked minority customers. What gives?

Stephanie Mencimer

A number of big national banks stand
accused of systematically bilking black and Latino borrowers. And the
administration of our first black president is siding with the banks.

At the end of April, the Obama administration will go before the US
Supreme Court to argue that those banks-including bailout recipients
Bank of America, Citi, Wells Fargo, and JPMorgan Chase-should be
allowed to duck a state investigation into their lending practices. If
that sounds like the politics of the past, it is. The Obama
administration has opted to maintain the stance of the Bush
administration-one opposed by the NAACP and other major civil rights
groups. And it won't be some Bush holdover making the arguments in Cuomo v. The Clearing House Association
(an industry group whose membership includes the world's largest
banks). Instead, the banks will be defended by the office of Obama's
new solicitor general, former Harvard Law School dean Elena Kagan, whom
some conservatives have branded a "radical leftist" because of her
record opposing military recruitment on college campuses.

case got its start in 2005, when then-New York attorney general Eliot
Spitzer discovered that many banks operating in his state were issuing
a disproportionate number of high-interest loans to African Americans
and Hispanics. Invoking state anti-discrimination laws, Spitzer wrote
to those banks, politely asking for more information about their
lending practices. He didn't even issue a subpoena. Rather than respond
to the request, the banks sued Spitzer. They argued that they were
legally entitled to blow him off because federal banking law preempted
the state investigation-that is, only the feds could make such a
request, not some lowly state AG.

To make their case, the banks sought help from the Bush
administration, through the Office of the Comptroller of the Currency.
The OCC is a little-known federal bank regulator that over the past
decade has become increasingly active in helping those banks and their
subsidiaries squash state efforts to rein in abusive predatory lending
practices. The OCC joined the banks in the case as a plaintiff,
asserting that a Civil War-era banking law made the OCC the only
sheriff in town. When it came to big national banks like Bank of
America and Wells Fargo, only the OCC, it argued, could force the banks
to comply with state consumer protection laws like those banning racial
discrimination in lending.

With the OCC's backing, the banks prevailed in the trial court and
the US Court of Appeals for the 2nd Circuit. New York's current
attorney general, Andrew Cuomo, has appealed the case to the Supreme
Court, which will hear oral arguments in late April. Kagan's office
will be representing the OCC. The administration's position in Clearing House
stands in sharp relief to other parts of the US government, where
financial system regulators have recently come out in opposition to
shielding banks from state consumer protection laws and enforcement.

In March, on the same day Kagan was confirmed as solicitor general,
Federal Deposit Insurance Corporation chair Sheila Bair, a Bush
appointee, told the Senate banking committee that "it is time to
examine curtailing federal preemption of state consumer protection has now become clear that abrogating sound state laws,
particularly regarding consumer protection, created an opportunity for
regulatory arbitrage that frankly resulted in a race-to-the-bottom

Yet in their briefs in Clearing House, lawyers for the OCC
and Obama's solicitor general say that the OCC has used its authority
appropriately and has done a terrific job of protecting consumers from
abusive bank practices. It's a dubious claim at best. Until 2008, the
OCC had never taken a public consumer protection action against a major
bank. In fact, the OCC's light touch with national banks prompted many
state-chartered banks to switch their charters just so they could evade
stricter state regulation.

In an amicus brief in Clearing House, lawyers for consumer
advocates cite the example of Capital One, a company whose deceptive
and unfair credit card practices were investigated for several years by
the West Virginia attorney general. Three years into the investigation,
the bank changed its status from a state-charted bank to an
OCC-chartered bank. Less than two weeks later, Capital One asked a
federal court to halt the attorney general's investigation, arguing
that the OCC was now the only entity that could initiate such a probe.
The judge who heard the suit recognized that the bank was simply trying
to evade the attorney general. Nonetheless, he believed the law
required him to stop the state investigation.

Over the years, the OCC has tried to prevent state consumer
protection actions against all sorts of shady practices. For instance,
the OCC has intervened to prevent states from cracking down on
telemarketing fraud and misbehavior by car dealerships, an unlicensed
trade school, an air-conditioning company, and a mall that issued gift
cards-all because each of these entities had a financing relationship
with OCC-chartered banks. The OCC's track record in enforcing
anti-discrimination laws like those at the heart of the Clearing House
case is equally dismal. In their amicus brief, consumer lawyers note
that the OCC has brought only four formal enforcement actions under the
Equal Credit Opportunity Act since 1987. And during the Bush
administration, it didn't refer a single discriminatory mortgage
lending case to the Justice Department. Yet in her brief, Kagan argues
that the OCC "vigorously enforces fair lending laws against national

Kagan's brief appears as if it were largely written during the last
administration, which it no doubt was. It touts the supposedly great
work done by the OCC's Customer Assistance Group, which Kagan and the
OCC say has facilitated the recovery of tens of millions of dollars by
injured consumers. Back in 2005, I filed a Freedom of Information Act
Request with the OCC for information about how many people in this
group actually investigated and resolved consumer complaints. The
answer I eventually got many, many months later? Three, in an agency
that fields more than 70,000 complaints a year from bank customers. In
years past, the group has recouped less than $8 million annually for
consumers-a drop in the bucket compared to the billions banks collect
via abusive credit card practices or overdraft fees.

By comparison, the state attorneys general the OCC has tried to
neutralize have successfully gone after many lending institutions for
sleazy practices and recouped sums that dwarf anything the OCC has
recovered. During the past decade, attorneys general in various states
banded together and settled cases against Household and Ameriquest
Mortgage Company, once some of the nation's biggest subprime lenders.
The AGs recouped more than $800 million for consumers, but they were
often prevented from bringing similar cases against big banks because
of OCC interventions. And in Clearing House, the Obama administration is now defending the OCC's turf-conscious obstructionism.

The administration's brief in Clearing House was due only six
days after Kagan was confirmed. Reversing course in a case this far
along would have been both legally and administratively problematic for
her and the administration. But consumer advocates have seen a few
hints between the lines of her brief that the administration intends to
change its regulatory policy at the OCC. It is hard to imagine that
Obama would really want to usurp the states and remake the OCC as the
nation's preeminent financial consumer protection agency. That would
make the federal banking regulator ultimately responsible for policing
thousands of unscrupulous car dealers, air-conditioning installers,
trade schools, or even mall gift-card programs, simply because they had
financing relationships with national banks. Not only does the OCC not
have the resources to do all that; it has enough on its plate right now
just keeping the banks afloat. As Daniel Mosteller, litigation counsel
to the Center for Responsible Lending, observes, "Is the OCC really
going to start investigating malls?"

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