Subsidiaries exempt from state control
The U.S. Supreme Court ruled Tuesday that units of national banks were largely exempt from state regulation, a decision critics said would further erode the ability of California and other states to enforce consumer-protection laws.
The 5-3 decision involved a dispute between the state of Michigan and Wachovia Corp.’s mortgage loan subsidiary. But consumer groups said banks could use the ruling to run a variety of enterprises unrelated to banking -- and outside the scrutiny of state regulators.
The decision has “some scary implications,” said Kathleen Keest, an attorney for the Center for Responsible Lending, a non-profit advocacy group for borrowers.
She noted that the Office of the Comptroller of the Currency -- the primary federal banking regulator -- has published an 83-page booklet outlining endeavors that national banks may undertake. These include selling Medicare counseling, acting as a finder for used cars and marketing roadside aid plans.
“The OCC has no traditional expertise in things like roadside assistance programs,” Keest said.
The high court, however, ruled that units of national banks have the same exemption from state regulation as the banks themselves. Nearly all supervision is reserved for the Comptroller of the Currency, a federal agency created to oversee the banking system in the 1800s, Justice Ruth Bader Ginsburg wrote in the majority opinion.
Federally chartered banks are subject to general state laws that aren’t “inconsistent or intrusive,” Ginsburg wrote. “But when state prescriptions significantly impair the exercise of authority” under the National Bank Act, “the state’s regulations must give way.”
In California, officials at the attorney general’s office and the Department of Corporations, which regulates mortgage lenders, were trying to sort out the potential effects of the ruling.
The ruling could “in theory” present a problem for law enforcement by Atty. Gen. Jerry Brown, said his spokesman, David Kravets.
As an example, he noted that the state Department of Justice, as part of a probe of the student lending industry, Tuesday demanded records from two California student-loan businesses concerning their financial relationships with universities and vocational schools.
If such an investigation led to a bank subsidiary, the Supreme Court ruling would appear to put such requests off-limits.
Kravets wouldn’t speculate on how such a scenario might play out or whether his department, whose investigations include an ongoing probe of sub-prime lending abuses, has targeted any national banks.
The Department of Corporations has been bruised in past court battles with national banks that claimed to be free of its jurisdiction.
In one dispute four years ago, the agency sought to revoke Wells Fargo Home Mortgage’s lending license because the home-loan unit of Wells Fargo & Co. refused to make refunds to borrowers for what the state alleged were excessive interest charges and inadequate disclosures.
In the end, the U.S. 9th Circuit Court of Appeals ruled against the Department of Corporations, holding that the state must keep its hands off.
The Supreme Court decision “cements the previous decision by essentially making it apply nationally,” said Mark Leyes, a spokesman for the department.
The Comptroller of the Currency and other federal bank regulators have drawn criticism for doing little to prevent the meltdown of the sub-prime mortgage industry, which has left an estimated 1 million to 2 million borrowers likely to face foreclosure.
The Comptroller of the Currency said banks it supervised wrote only 10% of all sub-prime loans and were not among the institutions that had collapsed. The sub-prime loans made by banks supervised by the Comptroller of the Currency have a default rate only half as high as sub-prime loans overall, agency spokesmen said.
The most prominent of the troubled sub-prime lenders were not regulated by any federal banking agency, but instead by the states. These lenders included Orange-based Ameriquest Mortgage and its affiliates, which downsized drastically after paying $325 million to settle predatory lending allegations, and New Century Financial Corp. of Irvine, which has filed for bankruptcy protection.
Comptroller of the Currency John C. Dugan applauded the Supreme Court decision, which he said would allow national banks “to conduct business activities in their operating subsidiaries as they are now doing.”
“We will continue to supervise national banks and their subsidiaries to assure that their customers are treated fairly and receive the strong protections available under federal laws and regulations,” Dugan said.
National banks include such giants as Bank of America Corp. and Wells Fargo, which have led many of the challenges to state authority. Both successfully fought attempts by Berkeley and Santa Monica to ban automated teller machine fees.
Large federally chartered savings and loans, which include Washington Mutual Inc. and the banking subsidiary of Countrywide Financial Corp., are regulated principally by another federal agency, the Office of Thrift Supervision, which said the Supreme Court decision supported “an important public policy served by a nationwide lending standard.”
Keest of the Center for Responsible Lending said Ginsburg’s opinion was focused narrowly on the issue of whether operating subsidiaries should enjoy the same exemptions as the parent banks. Despite the Comptroller of the Currency’s contention that national banks have broad immunities, the courts could still find a role for state oversight, Keest said.
One closely watched case before the U.S. 2nd Circuit Court of Appeals involves a probe by former New York Atty. Gen. Eliot Spitzer, now New York’s governor, into mortgage lending. When Spitzer demanded records from three national banks, the Comptroller of the Currency sued, claiming that Spitzer had barged into federal territory.
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