New York City’s Responsible Banking Act (RBA) is preempted by federal and state law, a federal court has ruled.

Pursuant to the New York City Charter, only financial institutions that are designated “deposit banks” by the City Banking Commission may hold City funds. Enacted in 2012 over the veto of former New York City Mayor Michael Bloomberg, the RBA created an eight-person Community Investment Advisory Board (CIAB).

The RBA directed the CIAB to:

  • Complete a written assessment of the “credit, financial and banking services needs throughout the City with a particular emphasis on low and moderate income individuals and communities” (Needs Assessment)
  • Collect information to be published on the City Department of Finance’s (DOF) website relating to each deposit bank’s efforts in eight categories (such as efforts to address small business needs, provide funding for affordable housing and economic development projects, address health and safety deficiencies in foreclosed properties, and conduct consumer outreach, settlement conferences, and similar actions relating to mortgage assistance and foreclosure prevention)
  • Use such information to establish “benchmarks, best practices and recommendations for meeting the needs identified” in the Needs Assessment, and
  • Issue and publish on the DOF website an annual report that included an evaluation of each deposit bank’s performance relative to the CIAB’s benchmarks and best practices. Most significantly, the RBA also directed the CIAB, when publishing the information it collected and in the annual report, to “specifically identify” any deposit bank that failed to provide information requested by the CIAB and allowed the City Banking Commission to consider the report when evaluating whether to designate or de-designate an institution as a deposit bank.

The New York Bankers Association (NYBA) originally filed a lawsuit challenging the RBA in October 2013, which was dismissed for lack of standing. The court found that the NYBA could not, at that time, show a substantial risk of harm that was “certainly impending” due to Mayor Bloomberg’s refusal to enforce the law. The NYBA renewed its lawsuit in May 2015 after Mayor Bill de Blasio’s administration began to implement the RBA by requesting data from the deposit banks (which numbered 21 as of May 2015, including 15 NYBA members).

The NYBA argued that the RBA’s primary purpose was to regulate banks while the City claimed the RBA had a primarily “informational” purpose and did not impose compulsory requirements. Agreeing with the NYBA, the court found that that the RBA’s text and legislative history manifested a purpose to regulate banks by “encouraging” banks “to modify loans, increase lending, and provide more products and services to certain underserved or poorly served segments of the population.” The court also found that although the RBA did not explicitly require banks to provide information requested by the RBA, it did, as a practical matter, impose compulsory regulatory requirements through its “coercive power.” In the court’s view, “the RBA’s very structure secures compliance through public shaming of banks and/or threatening to withdraw deposits from banks that do not provide information to the CIAB.” It also found unpersuasive the City’s argument that the RBA did not invoke regulatory power because the Banking Commission had discretion whether to consider the CIAB’s report when designating or de-designating deposit banks.

The court concluded that the RBA was preempted by the National Bank Act because, by implicitly requiring national banks to provide data and information to the CIAB through the threat of reputational injury and/or de-designation, the RBA improperly granted visitorial powers to the CIAB. It also ruled that because the RBA sought to influence core banking activities such as real estate lending and deposit taking, it was preempted by OCC regulations governing such activities.

With regard to state-chartered banks, the district court concluded that the RBA was preempted by New York State banking law because the State had evidenced intent in such law “to occupy the field of banking regulation for state-chartered institutions.”

Finally, the court rejected the City’s argument that the RBA’s “coercive provisions” could be severed and, as a result, ruled that the RBA was void in its entirety.

As a matter of policy, local ordinances can be very disruptive operationally for banks and other consumer financial services companies (particularly for those that operate on an interstate basis) that already have their hands full in trying to comply with a plethora of federal and state laws. Over the years, an increasing number of local governments have enacted laws that purportedly apply to these banks and other companies. This opinion will hopefully deter other cities and municipalities from enacting similar legislation.

Ballard Spahr’s Consumer Financial Services Group is nationally recognized for its guidance in structuring and documenting new consumer financial services products, its experience with the full range of federal and state consumer credit laws throughout the country, and its skill in litigation defense and avoidance.

Copyright © 2015 by Ballard Spahr LLP.
(No claim to original U.S. government material.)

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