Court Strikes Down New York City “Responsible Banking Act” as Preempted by Federal and State Banking Laws: RBA Would Have Publicly Rated Banks and Threatened to Remove City Deposits From Them Based on the City’s Assessment of the Banks’ Community Lending and Other Activities

Sullivan & Cromwell LLP - August 10, 2015

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.