State Farm Mortgage

OTS opinion endorses federal preemption

January 18, 2005

By PATRICK CROWLEY

But with an opinion from the U.S. Treasury Department’s Office of Thrift Supervision, State Farm believes it does not need state approval for its army of agents to offer mortgage loans and other banking products.

That has the lending industry nervous and state officials girding for a fight.

John Ryan, an executive vice president with the Conference of State Bank Supervisors, a lending industry trade group, said the federal government’s blessing for State Farm to preempt state could present regulatory compliance issues in the future.

“CSBS respects the dual banking system, but decisions made this year by the (federal government) go beyond the letter of the law,” Ryan said in a written statement. “This is why CSBS feels that Congress needs to weigh in on the issue from a public policy standpoint.

“As (lenders) find themselves in competition with some 16,000 insurance agents hawking bank products, jumbo CDs, home loans and mutual funds absent compliance with state requirements, CSBS hopes they will better understand that preemption has many unanticipated consequences,” he said.

Illinois-based State Farm operates a federally chartered bank that markets its products not through branches but through its legion of more than 16,000 insurance agents across the nation.

“State farm is a nontraditional financial institution and does not have branch offices,” the company says on its corporate Web site. “The bulk of communication between the bank and its customers is through agents, augmented by telephone, mail and the Internet.”

State Farm ended 2003 with assets of $7.9 billion. Information for 2004 is not yet available.

Mortgage lending is only a small part, less than 2 percent, of State Farm’s overall business, according to financial reports posted on the company’s Web site.

But still, State Farm Bank more than doubled its mortgage lending business from 2002 to 2003. Accounts grew from 10,512 to 21,606 while originations jumped from $1.5 billion to $2.7 billion.

The company sought the opinion federal regulators so it could expand its business without subjecting its agents to state licensing requirements.

State Farm has issued statements indicating it supports the regulators decision.

In a 17-page opinion letter released in August John E. Bowman, chief counsel of the Office of Thrift Supervision, wrote that “subjecting federal savings associations that use agents to the burdens of complying with a hodgepodge of conflicting and overlapping state lending requirements undermines the federal objective of permitting federal savings associations to exercise their lending powers under a single set of uniform federal laws and regulations.

“Such requirements are tantamount to the state attempting to assume regulatory authority over federal savings associations operations,” Bowman added.

But officials in at least 17 states are, according to a report in USA Today, promising to monitor State Farm’s activities. Some officials are saying they will ignore the federal opinion and go after any company, including State Farm, that attempts to operate without state licenses that are designed to protect consumers and investors.

State Farm reportedly told USA Today it will work to resolve any differences or problems with the states.

Lenders also intend to keep up the pressure on federal officials over what they portray as “the dangers of federal preemption.”

“Some industry trade groups have tried to depict CSBS’s battle as a regulatory turf battle,” Ryan said. “With the latest preemptive strike by yet another federal agency CSBS will be broadening the discussion in the coming year.”