Court Strikes NYC’s “Responsible Banking Act”

On August 7, 2015, in a 71-page opinion, Judge Katherine Polk Failla of the United States District Court for the Southern District of New York struck down New York City Local Law 38 of 2012, entitled the “Responsible Banking Act” (“RBA”), as preempted by federal and state banking law. The RBA—enacted by the City Council on June 28, 2012, over Mayor Bloomberg’s veto—established an eight-member Community Investment Advisory Board (“CIAB”), charged with collecting data at the census-tract level from the 21 banks eligible to receive some of the City’s $150 billion in annual deposits. This data, which went beyond data required by federal and state banking regulators and would be disclosed publicly, covered a variety of categories ranging from the maintenance of foreclosed properties, to investment in affordable housing, to product and service offerings. Based on the data collected and feedback from public hearings, the CIAB was to develop “benchmarks and best practices” against which the deposit banks were to be evaluated, including against each other, in a publicly filed annual report. The report was to identify deposit banks that refused to provide the requested data. Finally, the RBA provided that the City’s Banking Commission—responsible for designating eligible deposit banks—“may” consider the CIAB’s annual report in making its designation decisions.

The New York Bankers Association (“NYBA”)—which includes 15 of the City’s 21 deposit banks as members and which had expressed its opposition to the RBA when it was being considered—filed suit in federal district court in New York challenging the RBA as preempted under federal and state banking laws. Sullivan & Cromwell represented NYBA in this suit, with partner Robert Giuffra arguing the summary judgment motion for NYBA. Examining the face of the RBA, its legislative history, and the enforcement of the law under Mayor de Blasio, Judge Failla agreed with NYBA, holding that the RBA is “preempted by federal and state law,” and “void in its entirety.” The Court found that the RBA conflicted with the National Bank Act, which (i) confers upon federal regulators the exclusive “visitorial power” to inspect the books and records of national banks, and (ii) permits national banks to engage in core banking activities, like mortgage lending, free of state and local restrictions. In addition, the Court agreed with NYBA that the RBA conflicted with the federal Community Reinvestment Act (“CRA”) and the New York State Banking Law.

The Court’s decision reinforces the primacy of federal and state law in the area of bank regulation, and makes clear that municipalities cannot circumvent the preemption doctrine—and thus impose their own views about banking practices—by shaming banks or by threatening (as opposed to mandating) that the municipality will cease doing business with them. The decision also sets a precedent for potential challenges to responsible banking acts currently in place in various cities across the United States, and should help deter future attempts to enact such ordinances.

Background to the RBA

The bill that became the RBA was introduced in the New York City Council on February 16, 2011. The sponsors of the bill explained that they wanted to be “creative,” and to find ways to leverage the City’s “enormous power” as a consumer of deposit services to “bring banks to the table” to effect various policy objectives of the Council, including increasing the number of mortgage modifications for City residents. At a hearing on the bill, Mayor Bloomberg’s administration opposed the proposal, arguing that the law “effectively anoints the [City] Department of Finance a bank regulator” and was “a misguided attempt to influence banks … by overlaying extensive existing federal and State bank regulation with yet another layer of City regulation.” Representatives of the New York State Banking Department (now a part of the Department of Financial Services) and NYBA also testified against the bill on the ground that it was preempted by federal and state law.

The City Council nevertheless passed the bill on May 15, 2012, with then-Speaker Christine Quinn noting that the RBA “add[s] information beyond what the [federal and state] community reinvestment acts require that banks disclose.” Mayor Bloomberg vetoed the bill on May 30, 2012. The Council overrode the veto the next month, but Mayor Bloomberg declined to appoint any members to the CIAB, leaving the law on the books but unenforced.

In March 2014, Mayor de Blasio announced that he was reversing the Bloomberg administration’s position, and took steps to enforce the RBA, including appointing CIAB members. The CIAB then hired a consultant to help to implement the RBA; held public hearings in each borough designed to identify the banking needs of City residents; and published a “needs assessment” on April 30, 2015, designed to “impact public policy and improve private lending behavior.”

The RBA’s Requirements

The terms of the RBA required the CIAB to collect data from deposit banks at a “census tract” level on their efforts, inter alia, to:

• “develop and offer financial services and products that are most needed by low and moderate income individuals and communities”;
• “provide funding, including construction and permanent loans and investments, for affordable housing and economic development projects in low and moderate income communities”;
• “conduct consumer outreach, settlement conferences, and similar actions relating to mortgage assistance and foreclosure prevention,” including, among other things, the total number of foreclosures prevented through loan modification and the total number of loan modification applications;
• “address the key credit and financial services needs of small businesses”;
• “partner in the community development efforts of the city”;
• “positively impact on the city and its communities through activities including, but not limited to, philanthropic work and charitable giving”; and
• “plan for and articulate how the bank will respond to the credit, financial and banking services needs of the city identified by the needs assessment.”

On May 13, 2015, the CIAB formally sent an “introductory request” to the deposit banks for data concerning these subjects—much of which is confidential and proprietary and not required by federal or state regulators.

The RBA also required the CIAB to “establish benchmarks, best practices, and recommendations for meeting the needs identified in such needs assessment, by, among other things, considering the data and information collected.” All information collected by the CIAB was required to be published on the City Department of Finance’s website. The CIAB was then to create an annual report that would (i) include “an evaluation of how each bank performed relative to the benchmarks and best practices applicable to such bank as established by the [CIAB]”; (ii) identify “areas of improvement from past evaluations” and “areas where improvement is necessary; and (iii) “specifically identify” any bank that did not provide the CIAB with the requested data.

The CIAB was then to transmit the annual report “to the banking commission” which “may” have considered it in “reviewing a bank’s application for designation or redesignation as a deposit bank.”

The Court’s Opinion

NYBA originally brought suit on October 11, 2013. The case was assigned to Judge Katherine Polk Failla, who dismissed it without prejudice on September 9, 2014, concluding that NYBA lacked standing because, as of the date NYBA brought its complaint, there was no “imminent” injury to deposit banks, as Mayor Bloomberg was refusing to enforce the law.

After NYBA members received the CIAB’s “introductory” request for bank data in May 2015, NYBA renewed its preemption challenge to the RBA. The Court entertained an expedited motion for summary judgment and granted NYBA’s motion on August 7.

In her ruling, Judge Failla held that the RBA “is preempted by federal and state law,” “[i]ts unconstitutional provisions cannot be severed,” and, “[a]s a result, the RBA is void in its entirety.” The Court undertook a comprehensive examination of the legislative history of the RBA and its enforcement under Mayor de Blasio, and concluded that the RBA is a regulatory law, because it “unambiguously seeks to advance general societal goals and encourage a general policy.” Judge Failla rejected the City’s argument that the law served mainly “informational” and “proprietary” purposes, observing that the RBA is targeted only at deposit banks, suggesting the City was, as Mayor Bloomberg put it, “impermissibly using the City’s power to designate banks” as a way to “pressure banks into adopting certain practices with respect to core banking matters.”

Judge Failla found that compliance with the RBA is not “voluntary,” because its very structure “secures compliance through public shaming of banks and/or threatening to withdraw deposits.” The fact that the Banking Commission had discretion to ignore the CIAB’s findings did not save the RBA, because many laws are discretionary, and, under the City’s theory, legislatures could immunize legislation that would otherwise be preempted “simply by changing the words ‘shall’ and ‘must’ to ‘may.’”

As a regulatory law, the Court held the RBA is preempted by New York State law, which “occupies the field” of bank regulation. The Court further held that the RBA is preempted by federal law, because it improperly granted the CIAB—“accompanied by all indicia of regulatory power, and stamped with the imprimatur of a governmental agency”—visitorial powers that belong exclusively to federal bank regulators. In concluding that the RBA also interferes with the federal CRA and core banking activities permitted under federal law, the Court pointed to declarations from deposit banks, noting that the banks already “invest substantial resources ensuring compliance with applicable federal laws and regulations, including the Federal CRA,” and that providing the additional information the City seeks will be “invasive” and “burdensome.”

Finally, the Court held that the “coercive” provisions of the RBA could not be severed from the remainder of the law, because it was clear the City Council would not have passed the RBA without these provisions, and there was no evidence the Council would have chosen to spend $500,000 on a “toothless” law.

Implications

Judge Failla’s decision reinforces a long line of preemption cases limiting the legal authority of local government units to regulate banks, and confirms that courts will scrutinize municipal laws that venture into the field of bank regulation. Such laws are increasingly common; since 2008, several other cities, including Boston, Kansas City, Los Angeles, Minneapolis, San Francisco, and Seattle, have passed “responsible banking” ordinances. Judge Failla’s decision provides precedent for potential challenges to the constitutionality of those ordinances and may deter other municipalities considering similar ordinances in the future.

The decision also confirms that courts will not permit municipalities to leverage their spending power to achieve preempted objectives, even through the use of “indirect” methods of coercion such as public “shaming” and threatened loss of municipal business.