“I don’t think you should assume that what a lawyer argues for a client is indicative of how he or she would react when you’re administering the law,” said H. Rodgin Cohen, senior chairman of Sullivan & Cromwell, a prominent corporate law firm.
Consumer advocates are particularly concerned about Noreika’s frequent reliance on the argument that federal banking laws and OCC regulations trump state laws — a concept known as preemption.
In 2005, when Noreika became a partner at Covington, the firm noted that “many of Mr. Noreika’s cases have challenged the validity of state and local laws as preempted by the federal banking laws” and listed Wells Fargo and Bank of America as prominent clients.
ProPublica identified more than a dozen such cases filed in federal court from 2000 through 2005. Most were dismissed or settled in banks’ favor.
“That’s a real problem,” said Lauren Saunders, associate director of the National Consumer Law Center in Washington, D.C. “States often have laws that protect consumers in areas where there are no national laws.”
Banking lawyers say it only makes sense to give precedence to federal banking laws. Otherwise, national banks would end up dealing with 50 different regulators rather than one — the OCC. That was the whole point behind Congress’ creation of the agency during the Civil War, when states’ conflicting regulations made banking and commerce more difficult.
But in the years before the financial crisis, as abuses in the mortgage-lending markets began to surface, the OCC was slow to act. States did act. Between 1999 and 2007, North Carolina and about 30 other states passed laws targeting predatory lending practices.
The OCC, meanwhile, adopted sweeping regulations that prevented those laws from applying to national banks and extended that protection to the banks’ state-chartered subsidiaries. In 2008, then-New York Gov. Eliot Spitzer accused the agency of embarking “on an aggressive and unprecedented campaign to prevent states from protecting their residents.”
At the time, Dugan brushed off the criticism. “Almost everyone who has paid attention to the subprime lending crisis has concluded that OCC-regulated national banks were not the problem,” he said in a statement responding to Spitzer.
But two separate inquiries — the Financial Crisis Inquiry Commission and a report by the U.S. Senate Banking Committee — disagreed. The commission concluded that the OCC’s preemption of state laws ended up “preventing adequate protection for borrowers and weakening constraints” on risky mortgages.
The banks used the OCC to engage in “regulatory arbitrage,” said Arthur Wilmarth, a professor at the George Washington University Law School.
Dugan did not return phone calls but said in an email, “I disagree categorically with Wilmarth.” He referred his testimony to the crisis investigators, in which he said the financial crisis was “not caused by federal preemption of state mortgage lending laws.” Instead, Dugan said, “the root cause of the mortgage crisis was exceptionally weak underwriting standards.”
In 2007, as Dugan presided over the OCC, Noreika and his Covington colleagues won the biggest preemption victory of all, Watters vs. Wachovia Bank. The case evolved from separate federal lawsuits involving banks that had sought to shield their subsidiaries from state laws and subsequently faced collapse or fell into legal trouble for their business practices — Wachovia, National City Bank of Cleveland and Wells Fargo. Wilmarth advised state banking regulators on the cases.
The cases were merged and went all the way up to the Supreme Court, where Noreika argued that state laws didn’t apply to subsidiaries of national banks like Wachovia. In a 5-3 vote, the high court agreed.
Preemption became an even bigger issue after the 2008 collapse of several big banks, including Wachovia. Local governments tried to sue banks for alleged misdeeds, but again were blocked by preemption.
By then, Congress was working on Dodd-Frank, and preemption was a hotly debated area of reform. One of the changes Congress enacted as part of the law was to negate the effect of the Supreme Court decision that Noreika had litigated. Dodd-Frank also gave local law enforcement authorities more power to bring lawsuits against national banks under state laws. And it created a revised set of rules under which the OCC can review state banking laws to determine if they should be preempted.
The responsibility for those reviews falls to the head of the OCC — now Noreika. He has the power to determine if a state consumer finance law is preempted by federal law.
“He will now have his hand on the preemption button,” said Wilmarth, the George Washington University law professor.
Grace Ashford and Masako Melissa Hirsch contributed research to this story.
Our work is licensed under a Creative Commons Attribution-Share Alike 3.0 License. Feel free to republish and share widely.