WASHINGTON (Reuters) - A divided U.S. Supreme Court ruled on Monday that the New York attorney general’s office can investigate whether national banks discriminated against minorities seeking mortgages.

The justices overturned part of a ruling by a U.S. appeals court that blocked state Attorney General Andrew Cuomo from investigating or enforcing the fair lending laws against national banks because they are subject instead to what has been viewed as less stringent federal regulation.

In a 5-4 ruling, Justice Antonin Scalia, one of the Court’s more conservative members, joined the four most liberal justices in allowing Cuomo to bring lawsuits, though he could not at the same time issue subpoenas.

The ruling struck down a regulation by the Office of the Comptroller of the Currency that essentially preempted states from enforcing their own fair lending laws, even when federal law appeared inadequate to protect consumers.

Scalia said it would be “bizarre” for states to be blocked from enforcing valid, non-preempted laws against national banks, such that “the bark remains, but the bite does not.”

Cuomo, in a statement, called the ruling “a huge win for consumers across the nation,” saying it reaffirms the role of state attorneys general “in protecting consumers from illegal and improper practices by our country’s biggest and most powerful banks.”

The Clearing House Association LLC, a group of big banks supporting the OCC rule, was “disappointed that the principle of uniformity in national bank enforcement has been breached,” according to a spokesman.

Comptroller of the Currency John Dugan said he was disappointed but his agency would work with the states to ensure fair access to financial services and consumer protections. “... everyone benefits from clarification of the law,” Dugan said in a statement.

REVIVES PROBE

Cuomo was trying to revive a probe begun in 2005 by his predecessor, Eliot Spitzer, into possible racial discrimination in mortgage lending.

Spitzer sent letters of inquiry to mortgage providers including Citigroup Inc, HSBC Holdings Plc, JPMorgan Chase & Co and Wells Fargo & Co in response to data he said appeared to show a significantly higher percentage of high-interest home mortgage loans issued to black and Hispanic borrowers than to white borrowers.

Two lower federal courts ruled against Cuomo, whose appeal won support from the other 49 states and Washington, D.C.

Cuomo contended that the economic crisis, due in large part to reckless subprime mortgage lending, has shown the need for more regulatory oversight and consumer protection.

Spitzer told Reuters by telephone that his office was driven to pursue the case because of concerns about disparate lending practices and concerns that subprime debt was becoming pervasive. “Obviously, it’s a little late to forestall the cataclysm that emerged when the subprime debt fuse finally exploded,” Spitzer said.

“As we look forward, this is a good thing for states to be able to ask the questions and get the information from nationally chartered banks as well as state chartered banks.”

BULLY PULPIT

The ruling is a “serious loss for the banking industry,” and also gives attorneys general a “bully pulpit.” said James Cox, a securities law professor at Duke University. “Even without subpoena power they can still hold press conferences and take steps to swing public opinion.”

Groups representing real estate agents, state bank officials, and consumer and civil rights organizations supported Cuomo’s appeal.

Monday’s ruling “is a victory for taxpayers, who have suffered enormously as a result of abusive business practices in all types of lending,” said Michael Calhoun, president of the Center for Responsible Lending.

The Supreme Court last addressed a similar issue in 2007, when it ruled that states cannot regulate the mortgage-lending subsidiaries of banks regulated by the Comptroller’s office, which is part of the U.S. Treasury Department.

The case is Cuomo v. Clearing House Association LLC, No. 08-453.