OCC Lawyer on Supreme Court Ruling

Those were the comments of Chief Counsel and First Senior Deputy Comptroller Julie L. Williams. She made her statements to the New York Bankers Association Wednesday in Washington, D.C., according to an announcement from the Office of the Comptroller of the Currency.

At issue is the U.S. Supreme Court’s 5-3 decision earlier this year in favor of the mortgage subsidiaries of federally-chartered banks and thrifts in the case Watters v. Wachovia Bank. The ruling exempted federally-regulated banks or their subsidiaries from state regulation.

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.

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.

“The OCC argued that an operating subsidiary is a federally-authorized means through which a national bank exercises powers authorized under federal law and that the exercise of those powers through the structural option of an operating subsidiary should not be treated any differently than if the powers were exercised directly by the bank,” Williams said in yesterday’s speech. “Ultimately, after years of litigation in federal district courts and federal courts of appeal, the Supreme Court agreed.”

She noted the ruling clarified the role of states versus federal regulators and reaffirmed an earlier ruling that state laws cannot conflict banking powers established by Congress under the National Bank Act.

In addition to the financial safety and soundness of federally-regulated banks, Williams said the decision clarifies that OCC is also responsible for overseeing their operations and customer interactions.

“We use a risk-based continuous supervisory process for all national banks,” the government attorney said. “In the course of our ongoing supervision, our examiners review the adequacy of a bank’s policies, systems, and controls relative to the character and complexity of the bank’s business, and evaluate whether the bank’s activities are being carried out in compliance with applicable consumer protection laws and regulations.”

She noted that recent subprime problems have not spread to the national banking system, and most subprime lending is done by state-regulated lenders. The agency has worked with the Conference of State Banking Supervisors to ensure complaints are directed to the right agency, and a new system — the Complaint Referral Express — will likely automate that process next year.

Violations will be shared between the federal and state governments, Comptroller of the Currency John C. Dugan said in testimony to the House Financial Services Committee in June. He noted the inefficiency of states trying to regulate banks that are already extensively supervised by OCC.

But Williams indicated some transactions involve federally-regulated mortgage wholesalers and state-regulated mortgage brokers. In those cases, OCC is working with the states to conduct parallel examinations and develop a baseline of useful compliance information. New York and Massachusetts are among the two states to start testing the program.

“I am hopeful — in fact quite optimistic — that the Watters decision will be the springboard for collaboration, not confrontation, between federal and state interests,” Williams concluded.

Sam Garcia worked in mortgage lending for twenty years prior to becoming publisher of MortgageDaily.com.

e-mail: mtgsam@aol.com