Agency Preemption and the Subprime Crisis

Abstract

A few years before the subprime mortgage market collapsed, several states began to notice a dramatic increase in the rate of foreclosures among many of their most vulnerable citizens. Attributing the increase to predatory lending, these states enacted a new type of fair lending law that, for the first time, imposed liability not only on the originators of abusive subprime loans, but also on investors in the secondary mortgage market that helped to finance those loans. National banks, which were some of the biggest players in the secondary market, went to their federal regulator, the Office of the Comptroller of the Currency (OCC), and asked the agency to preempt the state laws. The OCC agreed, and in January 2004 declared the laws preempted.

This paper examines that preemption determination and uses it as a case study to explore how best to address the phenomenon of agency preemption. The consensus view is that permitting agencies with narrow regulatory agendas to preempt state laws could unjustifiably undermine state autonomy. In response, commentators have repeatedly called on the courts to help check agency preemption. But courts are unlikely to prove up to the task: as a general matter, they lack the institutional competence to counter an agency’s expert and informed determination that certain state laws pose a substantial obstacle to federal regulatory goals. It is therefore unsurprising that the courts have readily deferred to the OCC’s highly contestable preemption determination. Effectively curbing agencies’ appetite to preempt will instead require the development of alternative approaches, which could include deputizing independent intra-agency authorities to vet preemption determinations, constituting a new body to institutionalize a greater role for state officials in regulatory decision-making, or crafting new procedural tools to guide courts’ review of agency preemption determinations.