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The Supreme Court of the United States has considered whether the National Bank Act (“NBA”) gave the Office of the Comptroller of the Currency (“OCC”) the power to regulate separately incorporated subsidiaries of national banks.
Wachovia Bank (“Bank”) is a national bank chartered by the OCC, pursuant to the NBA. The Bank operates Wachovia Mortgage (“Mortgage”), a corporation that is involved in real estate lending in Michigan. While the State of Michigan (“State”) exempts banks from its mortgage lending regulations, the State does require mortgage brokers, lenders, and services who are associated with subsidiaries of national banks to register with the State’s Office of Insurance and Financial Services (“Office”) for state supervision.
Mortgage registered with the Office from 1997 to 2003, but in 2003 it became a wholly owned subsidiary of the Bank and so discontinued its registration, claiming that the State’s registration requirements were pre-empted by the NBA. The Office’s Commissioner, Linda Watters (“Commissioner”), sent Mortgage a letter advising it that Mortgage would no longer be authorized to continue lending activities in the State because its registration had lapsed. In response, the Bank and Mortgage filed a lawsuit challenging the Office’s right to regulate Mortgage. The trial court ruled in favor of the Bank and Mortgage, and a federal appellate court affirmed this ruling. The Commissioner appealed.
The Supreme Court of the United States affirmed the lower courts. The court first looked at the NBA. Enacted in 1864 by Congress, the NBA was designed to establish a national banking system by regulating national banks on the federal level with one set of laws and rules promulgated by the OCC and Congress. The NBA pre-empts the application of all state banking laws to national banks in order to avoid duplicative or inconsistent state laws that would unduly burden a national banking system. States can regulate national banks only when the regulation does not interfere with the national bank’s or OCC’s exercise of their powers. The OCC has long regulated national banks and their subsidiaries as a single economic enterprise. The NBA explicitly authorizes national banks to engage in mortgage lending, and so it was clear that the State could not interfere with a national bank’s mortgage lending activities. The question before the Court was whether the NBA extends to a subsidiary of a national bank like Mortgage.
The Court found that the NBA covered subsidiaries like Mortgage. Looking at prior cases, the Court found that the focus of its inquiry had been on whether the state law in question interfered with the exercise of a national bank’s powers, not on the bank’s corporate structure. Mortgage lending is a power explicitly given to national banks in the NBA, and Mortgage was a subsidiary through which the Bank was exercising its powers as national bank. The Court rejected the Commissioner’s argument that Congress would have included affiliates of national banks within the NBA’s definition if Congress had intended subsidiaries to fall within the NBA, as operating subsidiaries were not even permitted at the time of the NBA’s creation and also the Court said that the Commissioner was reading the NBA’s definition of “affiliate” too narrowly since that definition would also encompass an operating subsidiary. Therefore, the Court affirmed the lower court rulings in favor of the Bank and Mortgage.
Three Justices (Stevens, Roberts, Scalia) dissented, arguing that the NBA did not cover Mortgage and other operating subsidiaries of national banks and so a state’s regulation of those entities is not pre-empted by federal law. Justice Thomas did not participate in the case.
Watters v. Wachovia Bank, N.A., 127 S. Ct. 1559 (U.S. 2007).
Editor's Note: NAR filed an amicus curiae brief in this case in support of the Commissioner, per the recommendation of NAR's Legal Action Committee.