The U.S. Supreme Court has ruled that a national bank subsidiary devoted to mortgage lending is subject to federal regulation, and states therefore are preempted from requiring such subsidiaries to conform to licensing, reporting and other state regulations.
The Court held that Wachovia’s mortgage business, whether conducted by the bank itself or through the bank’s operating subsidiary, is subject to regulation by the federal Office of the Comptroller of the Currency (OCC), and not to "visitorial" regimes of the states in which the subsidiary operates. Justice Ginsburg delivered the majority opinion in Watters v. Wachovia Bank, N.A., 127 S.Ct. 1559 (2007), joined by Justices Kennedy, Souter, Breyer and Alito.
The decision provoked a dissent by Justice Stevens, who was joined in rare fashion by Chief Justice Roberts and Justice Scalia. In his opinion, Justice Stevens accused the high court of departing from principles protecting the dual system of national and state banking. Justice Thomas did not take part in the case.
Watters continues the high court’s trend toward treating national banks as corporate units, despite their operations in numerous states.
Last year, the Supreme Court ruled that a national bank is a citizen of the state in which its main office is located for the purposes of diversity jurisdiction. The ruling provided access to federal courts similar to that enjoyed by national corporations and state banks. See Wachovia Bank, National Association v. Schmidt, No. 04-1186 (U.S., Jan. 17, 2006); Commercial Restructuring & Bankruptcy Alert, March 2006, p. 12, Quick Check, "U.S. Supreme Court: Diversity Jurisdiction."
Real Estate Lending
In Watters, Wachovia Bank had formed a subsidiary, Wachovia Mortgage, a North Carolina corporation engaged in real estate lending in several states including Michigan. Michigan state laws exempt national and state banks from state mortgage lending regulation, but require mortgage brokers, lenders and servicers that are subsidiaries of national banks to register with the state, pay fees, and concede to being subject to state regulatory oversight.
In 2003, Wachovia Mortgage advised Watters, who served as Commissioner of Michigan’s Office of Insurance and Financial Services, that it was surrendering its state mortgage lending registration. Wachovia Mortgage maintained that as a subsidiary of a national bank, Michigan’s registration and inspection requirements were preempted. Watters responded that Wachovia Mortgage no longer would be authorized to conduct mortgage lending in Michigan, and Wachovia filed suit.
Wachovia Mortgage and Wachovia Bank challenged certain provisions of two state laws, the Mortgage Brokers, Lenders and Services Licensing Act, and the Secondary Mortgage Loan Act. The bank challenged the state’s attempts to require registration, collect fees, investigate subsidiary activities, and take enforcement action.
At the outset, the Supreme Court noted that the National Bank Act (NBA) specifically authorizes federally chartered banks to engage in real estate lending, and bestows upon banks the power "[t]o exercise…all such incidental powers as shall be necessary to carry on the business of banking."
"In the years since the NBA’s enactment, we have repeatedly made clear that federal control shields national banking from unduly burdensome and duplicative state regulation," the Court stated.
"States are permitted to regulate the activities of national banks where doing so does not prevent or significantly interfere with the national bank’s or the national bank regulator’s exercise of its powers," the Court continued. "But when state prescriptions significantly impair the exercise of authority, enumerated or incidental under the NBA, the State’s regulations must give way."
The Court then noted that the NBA authorizes national banks to engage in mortgage lending, subject to OCC regulation. Both parties recognized that the NBA preempted state regulation of real estate lending conducted by national banks, the Court stated.
Watters nonetheless argued that even though national banks’ operating subsidiaries are subject to OCC regulation, because they are separately chartered under state law, they are also subject to multistate control.
But the Supreme Court disagreed, distinguishing between national bank operating subsidiaries—which conduct the same business as their parent banks—and bank affiliates—which can engage in a broader spectrum of business activities.
The OCC has recognized the authority of banks to do business through "operating subsidiaries" since 1966, the Court noted. Congress recently amended the NBA to confirm that operating subsidiaries only may conduct the same kinds of business authorized by national banks. For supervisory purposes, the OCC treats national banks and their operating subsidiaries as a single economic enterprise, stated the Court.
However, Congress also amended the NBA to specify that bank affiliates may conduct nonbanking financial activities, such as in the areas of securities and insurance. These affiliates are subject to state regulation, the Supreme Court stated.
Dissent
In his dissent, Justice Stevens wrote that Congress did not immunize national bank subsidiaries from state regulation, nor did it authorize the OCC to preempt state laws.
State-chartered banks continued to thrive after passage of the National Bank Act, creating a "dual banking system" that has resulted in a "competitive mix of state and national banks," Justice Stevens wrote. The "lodestar" of preemption jurisprudence has long been the principle that "‘[i]t is only when the State law incapacitates the banks from discharging their duties to the government that it become unconstitutional,’" he wrote, citing precedent.
"Until today, we have remained faithful to the principle that nondiscriminatory laws of general application that do not "forbid" or "impair significantly" national bank activities should not be preempted."
This article is presented for informational purposes only and is not intended to constitute legal advice.
