The attorneys general and bank regulators of all 50 states had urged the justices to find the regulation out of bounds, either as a misinterpretation of the National Bank Act or as a matter of constitutional federalism. Consumer groups told the court that a decision upholding the federal agency’s claimed power of pre-emption would displace state oversight at a time when the mortgage lending industry urgently needed close supervision.
But by a vote of 5 to 3, the court held in an opinion by Justice Ruth Bader Ginsburg that the assertion of regulatory power by the comptroller of the currency was fully, if implicitly, authorized by federal law. Referring to the National Bank Act by its initials, Justice Ginsburg said, “Diverse and duplicative superintendence of national banks’ engagement in the business of banking, we observed over a century ago, is precisely what the NBA was designed to prevent.”
Justice Ginsburg said it was appropriate to treat a bank’s operating subsidiary as “subject to the same terms and conditions that govern the national bank itself.” A national bank’s authority to engage in mortgage lending through a subsidiary, a power the comptroller of the currency granted 41 years ago, “cannot be significantly impaired or impeded by state law,” Justice Ginsburg said.
Justice John Paul Stevens wrote a vigorous dissenting opinion that Chief Justice John G. Roberts Jr. and Justice Antonin Scalia also signed. Justice Clarence Thomas recused himself because his son and daughter-in-law both work for Wachovia Bank, which filed the lawsuit that led to the Supreme Court case.
The regulation that the court upheld pre-empts state regulation of any banking activity that a national bank conducts through an operating subsidiary. The decision therefore presumably applies beyond mortgage lending to other activities that subsidiaries commonly engage in, like the sale of annuities, automobile loans, small-business lending and investment advice.
The office of the comptroller of the currency has licensed nearly 500 national bank subsidiaries that deal directly with consumers in these and other types of retail activities.
Wachovia began the legal action in 2003 by bringing suit against Michigan’s bank regulator, Linda A. Watters. The bank, which is based in Charlotte, N.C., and has no branches in Michigan, sought a declaration from the Federal District Court in Grand Rapids that under the comptroller of the currency’s recent rule, its mortgage lending unit was no longer subject to state regulation.
Wachovia also brought a similar suit against Connecticut’s department of banking. It won both cases, both at the district court and appeals court levels. Other banks were bringing other cases at the same time. In all, four federal appeals courts have heard these cases, and all four, including the Court of Appeals for the Sixth Circuit in this case, ruled for the banks and against the states.
The Supreme Court chose Michigan’s appeal, Watters v. Wachovia Bank, No. 05-1342, as its vehicle for deciding the issue. The justices will now promptly turn down Connecticut’s pending appeal, Burke v. Connecticut Department of Banking, No. 05-431.
The court’s consideration of the Michigan case, which was argued in November, coincided with heightened public interest in the mortgage industry as the falling real estate market and resulting foreclosures have raised questions about predatory lending practices.
Some analysts said the ruling could shape the Congressional debate over the need for tougher regulation to protect consumers.
“Congress could use it as an opportunity to look at the pre-emption doctrine and put their own stamp on it,” said Brian Gardner, a Washington policy analyst at Keefe Bruyette & Woods in New York. The risk, however, is that it could potentially complicate passage of a predatory lending bill, he said.
Representative Barney Frank, the Massachusetts Democrat who heads the House Financial Services Committee, was presiding over a hearing on the foreclosure problem when the court announced its decision on Tuesday morning.
“We have to act on this,” Mr. Frank said in an interview later in the day. “The court has eliminated a whole bunch of state consumer laws with nothing to put in their place.”
National banks have unquestionably been immune from state regulation. The issue arose only with the growing number of operating subsidiaries, authorized by the comptroller of the currency in 1966 to conduct various types of financial activities. States chartered and regulated these new institutions; Wachovia’s mortgage lending subsidiary, originally called First Union Mortgage, is chartered by North Carolina.
The regulation issued by the comptroller of the currency in 2001 asserted that state laws could apply to national bank subsidiaries only to the extent that they could apply to the parent banks themselves, thus stripping states of authority they had been exercising for 35 years.
The legal question in the case was whether an agency regulation, which was not directly imposed by Congress and purporting to displace state regulatory authority, was entitled to the usual degree of deference that courts give to federal agencies.
Justice Stevens, in his dissenting opinion, said that the absence of Congressional authorization meant that no deference was due. “Never before have we endorsed administrative action whose sole purpose was to pre-empt state law rather than to implement a statutory command,” he said.
Justice Stevens said that while he agreed with the majority that the regulation was not unconstitutional, the court should be aware “that its ruling affects the allocation of powers among sovereigns.”
In her majority opinion, Justice Ginsburg said the question of deference was “beside the point” and “academic” because the regulation “merely clarifies and confirms” the essence of the National Bank Act.