High Court Sides With Banks on Mortgage Rules

By Robert Barnes and Dina ElBoghdady
Washington Post Staff Writers
Wednesday, April 18, 2007

The Supreme Court ruled yesterday that states may not regulate the mortgage-lending subsidiaries of national banks, in a case that pitted all 50 states and consumer groups against banks and their federal overseers.

The national banks had argued that their subsidiaries were subjected to an unduly burdensome patchwork of state rules and regulations when Congress had made it clear they should be regulated by the U.S. Office of the Comptroller of the Currency (OCC). The states had argued that their role was lawful and necessary to protect consumers from predatory lending practices and other potential violations.

In a 5-to-3 ruling, the court sided with the national banks.

"We have repeatedly made clear that federal control shields national banking from unduly burdensome and duplicative state regulation," Justice Ruth Bader Ginsburg wrote in an opinion joined by Justices Samuel A. Alito Jr., Stephen G. Breyer, Anthony M. Kennedy and David H. Souter. Chief Justice John G. Roberts Jr. dissented, along with Justices Antonin Scalia and John Paul Stevens. Justice Clarence Thomas recused himself for undisclosed reasons.

The Supreme Court's ruling coincides with national debate on how to stem a surge in missed home mortgage payments and foreclosures, both of which have risen to record levels in some parts of the country. As the mortgage crisis unfolds, federal and state regulators have been accused of failing to properly monitor industry practices, most notably abusive lenders who charged excessive or unnecessary rates and fees for their loans.

Yesterday's ruling will help national banks better cope with the problems at hand, said Edward L. Yingling, president and chief executive of the American Bankers Association. "Instead of being distracted by who is enforcing which law, now the industry can focus on the more important issue of compliance with the law itself."

Consumer advocates, however, argued that the states have been much more effective at policing lenders. They said Congress should preserve the states' role through legislation.

"This puts the ball squarely in Congress's court to decide what if any authority it wants to see states have in this arena," said Allen Fishbein, director of housing and credit policy at the Consumer Federation of America.

At the end of March, there were 1,786 national banks, controlling nearly $7 trillion in assets, or about 70 percent of the commercial banking industry's assets. About 10 percent of those banks have state-incorporated banking subsidiaries.

For decades, the banks and subsidiaries were regulated by the OCC. Some states also asserted the authority to regulate the subsidiaries. But in 2001, the OCC ruled that banks' "operating subsidiaries'' -- entities authorized to do only what the bank itself could do -- should not be subject to state control.

In the specific case, Wachovia Mortgage in 2003 informed Michigan regulators that it had become a wholly owned subsidiary of Wachovia Bank and would no longer comply with state regulations. Linda Watters, the Michigan commissioner of financial and insurance services, told the mortgage company it could no longer lend in the state, and the case decided yesterday, Watters v. Wachovia, was born.

Ginsburg said there was no dispute that a state cannot subject a national bank to its "visitorial" controls, and the same must go for its subsidiaries.

"Just as duplicative state inspection and supervision would significantly burden mortgage lending by national banks, so too those state controls would interfere with that same activity when conducted by a national bank's operating subsidiary," Ginsburg read from the bench.

But Stevens said that the court was tampering with a dual state-federal system of regulating banks that had served the country well and endorsing "an agency's incorrect determination that the laws of a sovereign state must yield to federal power."

"The federal interest in protecting depositors in national banks from their subsidiaries' liabilities surely does not justify a grant of immunity from laws that apply to competitors," Stevens wrote, adding that the OCC rule "may drive companies seeking refuge from state regulation into the arms of federal parents."

He added that it was "especially troubling that the court so blithely preempts Michigan laws designed to protect consumers,'' which is "quintessentially" a field the states have occupied.

In another business case decided yesterday, a 7-to-2 ruling reinforced the Federal Communications Commission's role in disputes between companies. The FCC is charged by Congress with establishing rules for a communications carrier to compensate a pay-phone operator.

In Global Crossing v. Metrophones, the decision means pay-phone provider Metrophones Telecommunications may pursue a federal court case to receive payment from Global Crossing Telecommunications.

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