Lenders Win Supreme Court Case

At stake was the right for national mortgage lenders with federal charters to ignore state statutes such as anti-predatory lending laws and state regulators and instead follow federal guidelines.

New York Attorney General Eliot Spitzer, as well as many other states, have attempted to regulate the institutions, arguing that state laws provide stronger protections for consumers than federal law.

“We hold that Wachovia’s mortgage business, whether conducted by the bank itself or through the bank’s operating subsidiary, is subject to [the Office of the Comptroller of the Currency’s] superintendence, and not to the licensing, reporting, and visitorial regimes of the several States in which the subsidiary operates,” Justice Ruth Bader Ginsburg wrote in Watters v. Wachovia.

Ginsburg noted that the court’s decision is in line with the federal appellate courts that have ruled on the issue.

A Wachovia spokeswoman told MortgageDaily.com, “Wachovia is pleased that the U.S. Supreme court ruled in Wachovia’s favor on the issues in this important case.” She declined to provide any further information.

Michigan Office of Financial and Insurance Services Commissioner Linda A. Watters said in a written statement that she was disappointed by the court’s decision. OFIS had asked the High Court to review the case after it lost in both the federal trial and appellate courts.

Watters also noted that a multitude of briefs supporting Michigan’s stance were filed in the case, including a brief prepared by New York Attorney General Eliot Spitzer that was endorsed by every state attorney general including those of Washington, D.C. and Puerto Rico and that the Center for Responsible Lending had filed a brief that was signed by at least a dozen public interest groups.

Pat Vredevoogd Combs, the president of the National Association of Realtors, described the court’s ruling as disconcerting because it increases the value of the federal charter at the expense of state licensing, marketplace competition and consumer protection measures.

She also said that should banks be permitted to broker real estate, a possibility mentioned in Justice John Paul Steven’s dissent, that the OCC might claim a similar exemption from state real estate regulations for subsidiaries engaged in brokerage.

Stevens declared the majority opinion to be an incorrect endorsement of OCC’s position, explaining that Congress has not enacted legislation freeing national bank subsidiaries from compliance with nondiscriminatory state laws regulating the activities of mortgage brokers and lenders. He also said Congress has not authorized an executive agency to preempt state laws whenever it concludes that they interfere with national bank activities.

Chief Justice John G. Roberts, Jr. and Justice Antonin Scalia joined Stevens’ opinion. Justice Clarence Thomas did not take part in the decision.

The ruling stemmed from Wachovia Bank’s conversion in 2003 of a mortgage company through which it had conducted business in Michigan into an operating subsidiary of the national bank headquartered in North Carolina. Wachovia then told Michigan regulators that it would no longer be required to be registered in Michigan, claiming that regulations passed by the OCC preempted any potentially applicable state mortgage laws.

But the state told Wachovia that without registration, it would no longer be allowed to conduct mortgage lender, broker and servicer activities in Michigan.

Wachovia then sued the state regulator and won in federal district court and the U.S. Sixth Circuit Court of Appeals. Michigan successfully petitioned the Supreme Court to decide the case.

And Wachovia faced the same situation in other states.

Wachovia Mortgage Co., a North Carolina corporation, was licensed in Connecticut in 1987. It surrendered its state license when it became a subsidiary of nationally chartered Wachovia Bank. The Banking Commissioner of Connecticut ordered the mortgage company to stop because it was performing mortgage lending without a license.

Wachovia also took the Connecticut case, Wachovia Bank, N.A. v. Burke, to federal court. It asked the court to rule in its favor on the ground that the National Bank Act and regulations issued by the OCC preempted the enforcement of Connecticut banking laws against Wachovia Mortgage.

As in the Michigan case, the district and appellate courts ruled in Wachovia’s favor. The U.S. Second Circuit Court of Appeals explained that OCC’s regulations governing real estate lending clearly established that state banking laws could not be enforced against subsidiaries that, like Wachovia Mortgage, engaged solely in real estate lending activities.

Connecticut Attorney General Richard Blumenthal has asked the Supreme Court to review that case. The Supreme Court is expected to decide later this week whether it will also hear the Connecticut case.

Lisa D. Burden is a legal analyst for MortgageDaily.com and holds a law degree from the University of Maryland. She is currently a freelance journalist who previously wrote for Institutional Investor publications and the Baltimore Daily Record.

e-mail Lisa at: burdenlisa@yahoo.com