Spitzer Suit Tests Validity of New Federal Banking Rules

In an effort to test the laws governing whether federally chartered banks fall under state consumer protection regulations, New York attorney general Eliot Spitzer filed suit on Friday on behalf of a bank customer.

The Bush administration has championed laws that keep federally chartered banks insulated from state consumer laws, a stand that many Democrats and most of the state attorneys general take issue with.

The new rules were issued on Jan. 7 by the Office of the Comptroller of the Currency in the Treasury Department, which oversees national banks like Citicorp, Bank One, Bank of America Corporation, Wells Fargo and Wachovia. The rules confirm the rulings of several courts that have stated in recent years that only the federal government can regulate national banks and that federal law overrules state laws, Dow Jones Newswires reported. The rules keep states from protecting consumers who deal with the banks within their boundaries.

Spitzer has locked horns with the federal government before over his authority to, for instance, chase down Wall Street criminals and those who pollute in other states.

"This is a continuation on the part of the Bush administration to pre-empt state enforcement in areas that are critical to ensuring civil rights and consumer rights," he said. "Things from predatory lending to spam to the quality of the air are implicated."

Robert M. Garsson, a spokesman for the comptroller of the currency, defended the rules, which he said date back to the creation of the national bank system during the Lincoln administration. "It's not something someone just dreamed up yesterday," he told Dow Jones. "The states don't have the power to curtail federally authorized activity." The new rules, which were supported by the major banks, go into effect in 30 days.

Spitzer is using as his test case a situation in which a 1974 mortgage issued by Mechanics Exchange Savings Bank to Robert H. Hall of East Greenbush, NY. The loan was sold several times finally landing with First Horizon Home Loan Corporation in Irving, TX, a subsidiary of a national bank, First Tennessee. Over time Hall claims he overpaid the mortgage by more than $9,000 and when he refused to pay more until the matter was resolved, the lender threatened to foreclose, a threat that was revoked when Spitzer filed his lawsuit. First Horizon has not agreed to reimburse Hall for the alleged overpayments.

"This case demonstrates perfectly why our role is critical and that the banks are already using the office of the currency comptroller as a shield," Spitzer said.

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