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CONSUMER FINANCE HEADLINES & DEADLINES FOR OUR CLIENTS AND FRIENDS

SPECIAL ALERT

Supreme Court Narrowly Upholds Preemption of State Regulation of
National Bank Mortgage Subsidiaries

In a 5-3 opinion, the United States Supreme Court affirmed the opinion of the U.S. Court of Appeals for the Sixth Circuit that the state of Michigan may not require a mortgage company that is an operating subsidiary of a national bank to register with the state financial services regulator or comply with state mortgage lending laws.  The majority opinion in Wachovia v. Watters was written by Justice Ruth Bader Ginsburg, who was joined by Justices Samuel A. Alito, Jr., Stephen G. Breyer, Anthony M. Kennedy, and David H. Souter.  The Court stated that “in analyzing whether state law hampers the federally permitted activities of a national bank, [the Court has] focused on the exercise of a national bank’s powers, not on its corporate structure.” 

The Court noted that it had previously upheld determinations by the Office of the Comptroller of the Currency (OCC) that national banks may act as agents for the sale of annuities and offer discount brokerage services, and that it was immaterial in those cases that the bank engaged in the activity through an operating subsidiary. 

The Court rejected the state regulator’s argument that 12 U.S.C. §484(a), which grants exclusive “visitorial” authority over national banks to the OCC, applies only to the regulation of the bank itself and not to regulation of operating subsidiaries, even though another provision, 12 U.S.C. §481, which gives the OCC the power to examine affiliates of national banks, does not have a preemption provision.  The state claimed that this difference indicated a congressional intent to confine the OCC’s exclusive authority to its regulation of the bank itself.  The Court rejected this argument, noting, among other things, that the state regulator’s argument disregards the distinction between an operating subsidiary, which can only engage in activities that are permitted for the bank directly, and other affiliates such as financial subsidiaries that may engage in activities such as “securities and insurance” that are prohibited to the bank itself. 

Although the Court agreed with the OCC regulation, 12 C.F.R. §7.4006, which states that “[u]nless otherwise provided by Federal law or OCC regulation, State laws apply to national bank operating subsidiaries to the same extent that those laws apply to the parent national bank,” it stated that the question of whether the OCC had the authority to issue such a regulation or the courts should defer to it is an “academic question” because the regulation “merely clarifies and confirms what the NBA already conveys: A national bank has the power to engage in real estate lending through an operating subsidiary, subject to the same terms and conditions that govern the national bank itself; that power cannot be significantly impaired or impeded by state law.”  The Court’s opinion contrasts with those of the Sixth Circuit and the other Courts of Appeals that addressed the operating subsidiary preemption issue, which analyzed the issue as a question of OCC authority and held that the OCC’s regulation was entitled to deference under the Supreme Court’s Chevron doctrine.

Justice John Paul Stevens’s dissent, in which he was joined by Chief Justice John G. Roberts, Jr., and Justice Antonin Scalia, argued that, despite its disclaimers, the majority was, in effect, allowing the OCC to preempt state law by regulation.  Justice Clarence Thomas did not participate in the case.

The opinion is available on the Supreme Court’s web site at http://www.supremecourtus.gov/opinions/06pdf/05-1342.pdf.

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