Bank
subsidiaries are immune
Federal
banking law preempts state law
By
David Ziemer
david.ziemer@wislawjournal.com
April
23, 2007
| What
the court held Case:
Watters v. Wachovia Bank, N.A., No. 05-1342. Issue:
Are subsidiaries of national banks subject to state regulation? Holding:
No. Like national
banks themselves, subsidiaries are governed by the Office of the Comptroller of
the Currency. |
The
National Bank Act (NBA) preempts state regulation of subsidiaries of national
banks, the U.S. Supreme Court held on April 17.
The
NBA authorizes federally chartered banks to engage in real estate lending. It
also provides that banks shall have power to exercise all incidental powers necessary
to carry on the business of banking.
Among
the incidental powers is authority to conduct activities through subsidiaries.
Wachovia
Bank, a national bank, conducts its real estate lending business through a state-chartered
subsidiary.
The
State of Michigan advised the subsidiary that it could no longer conduct mortgage
lending activities in Michigan, after it refused to comply with Michigan’s
registration and inspection requirements.
Wachovia
sued in federal court, arguing that Michigan’s regulations were preempted
by the NBA.
The
district court granted summary judgment in favor of Wachovia, and the Sixth Circuit
affirmed. 431 F.3d 556 (6th Cir. 2005).
The
Supreme Court granted review, and also affirmed, in a decision by Justice Ruth
Bader Ginsburg. Justice John Paul Stevens dissented, in an opinion joined by Chief
Justice John Roberts and Justice Antonin Scalia. Justice Clarence H. Thomas did
not participate.
The
U.S. Code, 12 U.S.C. 24a(g)(3)(A), provides that national banks can engage in
mortgage lending through subsidiaries “subject to the same terms and conditions
that govern the conduct of such activities by national banks.”
12
CFR 7.4006 (2006), promulgated by the Office of the Comptroller of the Currency
(OCC) provides, “Unless 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 was undisputed that the
parent national bank would be exempt from the State’s regulations.
Michigan
argued that the OCC regulation is not entitled to any deference, but the court
declined to address the proper level of deference to accord it, concluding that
the regulation merely confirms what the statute already conveys — that state
law cannot impede a national bank’s powers to operate through a subsidiary,
subject to the same terms that govern the bank itself.
Accordingly,
the court affirmed.
The
Dissent
Justice
Stevens dissented, concluding that the statute does not immunize national bank
subsidiaries from state regulation, nor does it authorize the OCC to do so.
The dissent
traced the history of the NBA, going back to the 19th century; throughout this
time, there has existed a “competitive mix of state and national banks known
as the dual banking system.”
In
addition to finding no express authority for preemption, the dissent concluded
that legislative history provides no support for the conclusion that Congress
intended for the NBA to preempt state laws.
The
dissent also cited policy concerns, objecting, “[I]t is especially troubling
that the Court so blithely preempts Michigan laws designed to protect consumers.
Consumer protection is quintessentially a ‘field which the States have traditionally
occupied,’ ... the Court should therefore have been all the more reluctant
to conclude that the ‘clear and manifest purpose of Congress’ was to
set aside the laws of a sovereign State (cites omitted).”
Finally,
the dissent concluded that, even if the issue were what deference to give the
OCC’s decision, it would not warrant Chevron deference, because of the potential
for disrupting the federal-state balance.
Click
here for Case Analysis.
David
Ziemer can be reached by email.
