21st Century Money,
Banking & Commerce
Alert
TM
www.friedfrank.com/bancmail/bancpage.htm
U.S. Supreme Court to Review State Regulation of
National Bank Operating Subsidiaries
Yesterday the U.S. Supreme Court accepted for review an appeal from
Wachovia Bank, N.A. v. Watters, 431 F.3d 556 (6th Cir. 2005), which held that
the National Bank Act and implementing regulations promulgated by the
Office of the Comptroller of the Currency (“OCC”) preempt state regulation of
operating subsidiaries of national banks.
This is a significant development and signals the willingness of the Supreme Court to
address the issue of federal preemption, which has been hotly debated in recent
years. Lower courts have unanimously upheld OCC rulings on federal preemption.
OCC regulations permit national banks to conduct business activities, including
mortgage lending activities, through operating subsidiaries. 12 C.F.R. § 5.34(e)(1)
(2006). OCC regulations establish federal licensing requirements and examination
procedures for those subsidiaries and permit them to conduct activities pursuant to
the same authorization, terms, and conditions that apply their parent national banks.
12 C.F.R. § 5.34(e)(3) (2006). The regulations further provide that state laws apply to
national bank operating subsidiaries to the same extent as they would to the parent
national bank. 12 C.F.R. § 7.4006 (2006).
In the Watters decision, Wachovia Mortgage, an operating subsidiary of Wachovia
Bank, N.A., sought declaratory judgment that Michigan law was preempted as applied
to national bank operating subsidiaries. The Michigan law at issue in this case
required Wachovia Mortgage to register with the state but did not require a license to
operate. It permitted the state to investigate a specific consumer complaint if that
complaint was not otherwise being pursued by federal regulators, and it required the
registrant to provide the state with financial statements annually, pay an annual
operating fee, and make certain documents available to the state for examination.
The court concluded that Michigan’s law was preempted by the National Bank Act and
OCC regulations, determining that the OCC regulations were a reasonable construction
of the agency’s authority under the National Bank Act.
continued on page 2
21st Century Money, Banking & Commerce AlertTM No. 06-06-21 June 21, 2006
Copyright © 2006. Fried, Frank, Harris, Shriver & Jacobson LLP. All rights reserved.
The Supreme Court’s granting of certiorari in Watters (Watters v. Wachovia Bank, N.A. et al., Docket No. 051342), comes as the culmination of over a year of significant caselaw developments in the area of operating
subsidiary preemption. Several other district and appellate cases have similarly held that the National Bank Act
and OCC implementing regulations preempt state regulation of national bank operating subsidiaries. See, OCC
v. Spitzer, 396 F.Supp.2d 383 (S.D.N.Y. 2005); Wachovia Bank, N.A. v. Burke, 414 F.3d 305 (2nd Cir. 2005);
Wells Fargo Bank, N.A. v. Boutris, 419 F.3d 949 (9th Cir. 2005); National City Bank of Indiana v. Turnbaugh, 367
F. Supp. 2d 805 (D. Md. 2005).
The Court granted certiorari in Watters to resolve two issues: whether the interpretation of the OCC that 12
C.F.R. § 7.4006 preempts Michigan’s law purporting to regulate mortgage lending by national bank operating
subsidiaries is entitled to judicial deference under Chevron U.S.A., Inc. v. Natural Resources Defense Counsel,
467 U.S. 837 (1984); and whether the regulation, by equating a national bank operating subsidiary with its
parent national bank for purposes of federal preemption of state regulation, violates the 10th Amendment to the
Federal Constitution.
That the Supreme Court would accept jurisdiction over this issue is somewhat surprising, for even though
preemption is a significant national issue, there is no split amongst the circuits – a factor that traditionally tends
to influence whether the Court grants certiorari – which have unanimously upheld the validity of the OCC
regulations. Additionally, in a similar case currently awaiting the Supreme Court’s determination as to whether
to grant certiorari, Wachovia Bank, N.A. v. Burke, 414 F.3d 305 (2nd Cir. 2005), the U.S. Solicitor General, at the
Court’s request, filed an amicus brief wherein the Solicitor argued that the Court not grant certiorari, noting that
in promulgating the regulations at issue, the “Comptroller acted well ‘within the scope of [his] delegated
authority’ under the National Bank Act.”
There are two probable reasons for the Court to grant certiorari in this case: either the Court believes that the
issue of preemption of state regulation of national bank operating subsidiaries is of such national importance
that the Court should affirm the OCC regulations, thereby providing some finality to the debate; or that the
decisions of the Second, Sixth, and Ninth Circuits have misapplied preemption principles, and therefore state
regulation of national bank operating subsidiaries is not foreclosed.
The ramifications for the banking industry should the Court reverse the Sixth Circuit’s decision are broad and
substantial. For banks with nationwide mortgage lending operations, the consequences of reversal would mean
reverting to the hodgepodge of state regulations that legislation such as the National Bank Act and the Home
Owners Loan Act were designed to prevent. Beyond national bank operating subsidiaries, a reversal would also
have a significant effect on operating subsidiaries of federally-chartered savings associations which rely on
regulations promulgated by the Office of Thrift Supervision (“OTS”) that are substantially similar to the OCC
regulations before the Court.
The issue of the preemptive reach of the National Bank Act, passed over 140 years ago, is as relevant as ever.
Even beyond the National Bank Act, the issue of state regulation of federally-chartered financial institutions
dates back to the early days of the Republic. See, McCulloch v. Maryland, 17 U.S. 317 (1819). It may well be
that the Supreme Court’s ruling in Watters v. Wachovia Bank, N.A. provides a new gloss on the issue of
preemption to guide courts into the 21st century.
21st Century Money, Banking & Commerce AlertTM
2
For more information regarding these and related issues, please feel free to contact any of the Fried Frank
attorneys listed below:
Washington, DC
Thomas P. Vartanian
202.639.7200
Robert H. Ledig
202.639.7016
David L. Ansell
202.639.7011
Travis P. Nelson
202.639.7039
Fried, Frank, Harris, Shriver & Jacobson LLP
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New York, NY 10004-1980
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