Mortgage lending subsidiaries of federally chartered banks are subject to federal oversight, not state regulations, the Supreme Court ruled in a 5-3 decision today.
Michigan regulators had sought to block the operations of Wachovia Mortgage Co., a subsidiary of Wachovia Bank, after the subsidiary surrendered its registration in Michigan. State law required bank subsidiaries to register with a state regulatory agency and submit to state supervision.
Wachovia contested these regulations in a lawsuit, charging that the state requirements do not apply because its subsidiary is regulated by the National Bank Act and the U.S. Office of the Comptroller of the Currency. The lower courts had held that federal regulations preempted state regulations in the oversight of a federally chartered banking company’s subsidiary.
Justice Ruth Bader Ginsburg delivered the court’s opinion in Watters v. Wachovia, and she was joined by Anthony Kennedy, David Hackett Souter, Stephen Breyer and Samuel Alito. Justices John Paul Stevens, John Roberts and Antonin Scalia dissented.
In its decision, the Supreme Court found that federal banking law provides that “A nation bank may engage in real estate lending through an operating subsidiary, subject to the same terms and conditions that govern the bank itself; that power cannot be significantly impaired or impeded by state law.”
Also, the decision states, “This court has never held that the (National Banking Act’s) preemptive reach extends only to a national bank itself,” and “the court has treated operating subsidiaries as equivalent to national banks with respect to powers exercised under federal law.”
While lawyers for Linda A. Watters, commissioner for the Michigan Office of Insurance and Financial Services, argued that an OCC rule related to the preemption of state laws violated the 10th Amendment, the court found that the amendment “is not implicated here.”
In the dissenting opinion, Stevens stated, “Congress has enacted no legislation immunizing national bank subsidiaries from compliance with non-discriminatory state laws regulating the business activities of mortgage brokers and lenders,” and found the OCC’s rules to be “an agency’s incorrect determination that the laws of a sovereign state must yield to federal power.”
The court’s decision, he said, will have a “significant impact … on the federal-state balance and the dual banking system.”
The American Bankers Association today announced its support for the Supreme Court decision. Edward L. Yingling, ABA president and CEO, said in a statement, “The court’s decision reaffirms that, for national banks, the business of banking — whether through the bank itself or an operating subsidiary — is regulated by the OCC.”
He added, “Avoiding a patchwork of duplicative and conflicting federal and state regulation makes it easier for national banks to grant credit to customers across state lines and preserves our industry’s competitive structure. It’s important to note that operating subsidiaries are subject to the full range of federal consumer protection laws that apply to national banks. Today’s decision puts the focus back where it belongs. Instead of being distracted by who is enforcing which law, now the industry can focus on the more important issue of compliance with the law itself.”
The National Association of Realtors, meanwhile, had earlier filed a brief with the Sixth Court of Appeals to support state regulation of national banks’ subsidiaries and oppose preemption by the OCC.
Pat Vredevoogd Combs, president of the Realtor trade group, said in a statement that she is disappointed with the Supreme Court’s decision.
“Any persons or organizations that are concerned with state statutes and regulations, and the ability of the federal government to preempt these state regulations, should find today’s opinion disconcerting. NAR continues to believe that Congress did not authorize the OCC to exempt these mortgage lenders and other state-chartered corporations, wholly owned by national banks, from complying with certain state laws,” she stated.
“The Court’s ruling to the contrary gives a tremendous competitive advantage to federally chartered banks over financial and non-financial competitors, increasing the value of the federal charter at the expense of state licensing, marketplace competition and potentially even consumer protection measures. The problems consumers face in the subprime mortgage market illustrate why it is important to retain and strengthen, rather than weaken, state consumer protection laws.
“With national banks now operating in the insurance and securities industries, and continuing their push to enter into real estate transactions, I am concerned about the implications of this ruling for our industry. This could mean that, should banks ever be permitted to broker real estate, which Justice Stevens’ dissent identifies as a possibility, the OCC may likewise claim a similar exemption from state real estate regulations for operating subsidiaries engaged in brokerage,” Vredevoogd Combs stated.
The Realtor association has aggressively lobbied to keep federal banks out of the business of real estate brokerage, charging that this would put companies that lack backing from big banks at a disadvantage. Supporters of national banks’ entry into the business of real estate brokerage have countered that such a move could inject new competition in the industry and point out that many brokerage companies operate lending divisions or have affiliations with lenders.
Michigan regulators were supported by all other states, which have said that state regulators are more capable of protecting consumers against predatory lending.
