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More on Compliance & Over-Regulation

December 5, 2006


A few days ago I blogged about corporate efforts to get relief from some of the more onerous portions of the Sarbanes-Oxley Act [Corporations, Compliance, & Competitiveness]. Those activities are taking place in the legislative arena. There are also efforts in the judicial arena to get relief from what they consider over-regulation. In this case, the banking industry is attempting to get the Supreme Court to rule that financial institutions should only be regulated federally as opposed to today’s situation which finds them regulated at both the federal and the state level [“Federal Oversight of Banks Risks Abuse, States Argue,” by Tomoeh Murakami Tse, Washington Post, 30 November 2006].

All 50 states and the District of Columbia yesterday urged the Supreme Court to overturn lower court rulings that they said would give federal authorities the ability to block states from prosecuting financial institutions for predatory lending practices. In oral arguments, the justices posed tough questions about the implications of a mortgage-lending case that could affect the way state-chartered subsidiaries of national banks are regulated. Chief Justice John G. Roberts Jr. expressed concern about the banks’ apparent effort to seek immunity from state regulations, but other justices suggested that banks are stumbling under excessive regulation by being required to report to both state and federal officials.

The case in question, Watters v. Wachovia Bank, focuses on mortgage lending practices but Tse notes that the implications flowing from the case go far beyond mortgage practices and could ultimately affect regulatory oversight of other industries.

Although the case centers on the lending practices of banks, legal experts said that it has broader implications for other industries that are also regulated on both the state and federal levels, in such areas as transportation safety, civil rights and environmental protection. At issue is whether state-chartered subsidiaries of national banks should be subject to the regulations of state governments or be solely under the purview of the federal Office of the Comptroller of the Currency.

One of the more interesting aspects of this case involves the age of the laws under consideration. One would think that banking laws in this age of electronic transfers would be some of the most up-to-date statutes on the books. Not so.

For 35 years, states have regulated the mortgage-lending practices of state-chartered subsidiaries of national banks. The parent national banks are regulated by the OCC. In 2001, the OCC ruled that those lenders should be overseen by the federal government under the National Banking Act of 1864, not by state regulators. And in 2003, officials at North Carolina-based Wachovia decided that their state-chartered subsidiaries, which are mortgage lenders but are not themselves banks, would no longer abide by the regulations of local jurisdictions and would answer only to the OCC. Michigan protested, so Wachovia sued for release from state oversight. The bank won on the lower court levels, and Michigan appealed to the Supreme Court. Critics of the OCC have long said the federal agency falls short in consumer protection and that it bases its regulatory decisions on maintaining the banks’ safety and soundness.

Tse reports that questioning by the Justices was intense, with some justices appearing to support the states and others who appeared to support the banking industry.

Chief Justice John G. Roberts Jr. expressed concern about the banks’ apparent effort to seek immunity from state regulations, but other justices suggested that banks are stumbling under excessive regulation by being required to report to both state and federal officials. … Roberts said it seemed that banks wanted to be viewed as federally governed on regulation issues but state-based to shelter themselves from liability issues. “You are really trying to have your cake and eat it too,” he said. Justice John Paul Stevens questioned whether the OCC had the manpower to handle the increased responsibility it took when it preempted state law in 2001. He asked specifically how many additional investigators the OCC had hired when it took over this responsibility. ” … Justice David H. Souter, however, noted that banks could be forced to go through two separate rounds of inspection — state and federal. “Regulation costs the regulated entity something,” he said. “It is a burden on them.”

I am certainly mindful that regulatory oversight can be costly and confusing. Keeping straight which regulations apply to which branches and making sure proper compliance takes place can be daunting. That is one of the reasons I invented the Enterprise Resilience Management Methodology®, which, inter alia, is a way to automate compliance processes — reducing costs and increasing accuracy. Normally conservative courts (which most people argue this Supreme now is) favor states’ rights. How they rule on this case will be one indication of the direction they will be taking over the next few years. It will be interesting to see if the lingering memory of the savings & loan scandals of the 1980s, during which under-regulation played a part, will have any effect on this case.

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