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Bank subsidiaries are immune

By: dmc-admin//April 23, 2007//

Bank subsidiaries are immune

By: dmc-admin//April 23, 2007//

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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.

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Case Analysis

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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.

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