Will Decide Whether Fed May Regulate Hybrid Institutions : High Court Joins ‘Non-Bank’ Fray

Times Staff Writer

The Supreme Court on Monday entered the controversy over “non-bank banks,” saying that it would decide whether the Federal Reserve Board may regulate the new limited-service institutions that are spreading across the nation.

The justices said they would review next term a federal appeals court ruling that voided a Federal Reserve regulation aimed at restricting the growth of the new institutions. The U.S. Comptroller of the Currency has chartered 170 limited-purpose banks, and applications for more than 200 are pending.

Limited-service institutions are designed to circumvent federal law prohibiting interstate branch banking. Current law defines a bank as an institution that accepts deposits for checking accounts and makes commercial loans. Non-bank banks do one or the other but not both--and thus have escaped the law.

A number of well-known non-banking companies have entered the field, including J. C. Penney, Gulf & Western and Dreyfus Corp. But some traditional, full-service banks, fearing for their own survival, have opposed the institutions. Legislation to restrict limited-service banks has been introduced in Congress but has not yet won approval.


In December, 1983, the Fed sought to narrow the loophole in the law by reclassifying the non-banks as conventional banks. It said that NOW accounts--negotiable order of withdrawal--offered by such institutions are, as a practical matter, little different from conventional checking accounts that allow the withdrawal of deposits on demand. And the involvement of limited-service banks in retail installment loans and other transactions amounts to traditional commercial lending, the Fed said.

The Fed’s new regulation would require commercial and industrial concerns to submit to Federal Reserve jurisdiction and register as bank holding companies or divest themselves of subsidiaries that the Fed regards as banking operations.

But a federal court of appeals in Denver ruled that the Fed had exceeded its authority, and the Fed brought the case to the Supreme Court, saying that the continued expansion of unregulated institutions would “change the face of banking” in the United States. The appellate decision, the Fed said, would “to a significant degree” undermine the nation’s long practice of separating banking and other commerce.

In other action, the justices:

- Left intact a federal appeals court ruling allowing the Environmental Protection Agency to order automobile manufacturers to recall and repair faulty emissions systems in cars that have been in use for more than five years or 50,000 miles. The court rejected an appeal from General Motors, in which GM contended that the EPA had exceeded its authority in issuing a rule expanding its power under the Clean Air Act to order recalls of all properly maintained and used vehicles, regardless of their age or mileage.

GM noted that more than 3 million emissions recalls had been ordered in 1983 alone and that the EPA’s new regulation would “increase dramatically” the number of vehicles eligible for recall.

- Refused to review decisions by the Washington state Supreme Court that absolved a group of 88 Northwest public utilities of financial responsibility in an ill-fated nuclear power project that ended in a $2.25-billion bond default--the largest in the history of the municipal bond market.

The court, without comment, let stand a state Supreme Court ruling in 1983 that Washington state utilities lacked authority to participate in two abandoned nuclear projects--a ruling that had led to the unprecedented default by the Washington Public Power Supply System (WPPSS). The state Supreme Court last year reaffirmed its ruling and upheld another decision by a state court judge freeing utilities in neighboring states as well.


Chemical Bank, trustee for bonds sold for the abortive project, appealed to the justices, citing the plight of thousands of bondholders who were left holding the bag. Lawyers for Chemical Bank argued that the state decisions amounted to an unconstitutional “taking of property” without due process of law. A “friend of the court” brief filed by a group of major investment banking firms said the case represented “the largest governmental confiscation of private property in American history.”

- Effectively blocked efforts by the Interstate Commerce Commission to deregulate the use of railroad boxcars. The court, without comment, let stand a ruling that limited the commission’s ability to loosen control over boxcars, which account for about one-fourth of the nation’s rail traffic.