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Mortgage Case May go to Supreme Court

Mortgage Case May go to Supreme CourtWachovia case to settle preemption issue

May 18, 2006

WASHINGTON correspondent for

The U.S. Supreme Court is expected to make its decision next month on whether to hear a case about whether mortgage lenders affiliated with national banks can be subjected to state anti-predatory lending laws.One state charges that consumers will pay the price if the states can’t police national mortgage lenders who engage in predatory practices.

“The states’ ability to regulate mortgage lending and, in particular, to protect the public from predatory and abusive lending practices is at stake,” Connecticut Attorney General Richard Blumenthal has warned. “The Second Circuit’s erroneous acceptance of [a federal agency’s] view of preemption, if left to stand, will seriously impair and undermine state law protections of home mortgage borrowers against the growing and potentially ruinous problem of predatory lending.”

Blumenthal asked the High Court to consider a federal appellate court decision that he says eliminates Connecticut’s ability to enforce its anti-predatory lending laws against Wachovia Mortgage. The U.S. Second Circuit Court of Appeals last year upheld a lower court ruling, Wachovia Bank, N.A. v. Burke, determining that federal law preempts state authority to regulate mortgage subsidiaries of national banks.

Wachovia Returns State Mortgage License

Wachovia Mortgage Company, a North Carolina corporation, became 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 engaging in mortgage lending without a license.

Wachovia took the case to federal court, asking the court to rule in its favor on the grounds that the National Bank Act and regulations issued by the Office of the Comptroller of the Currency preempted the enforcement of Connecticut’s banking laws.

The National Bank Act preempts state regulation of national banks. Under the act, subsidiaries are treated as consolidated with the parent bank for the application of many statutory and regulatory provisions, including various accounting and reporting requirements. The act specifically authorizes national banks to engage in real estate lending activity.

The OCC regulates national banks. The Comptroller issued a regulation that, in general, state laws apply to national bank operating subsidiaries to the same extent that those laws apply to the parent national bank.

The Comptroller has also issued regulations setting forth the standards for real estate-related lending and associated activities by national banks. The regulations governing real estate lending activities explicitly apply both to national banks and their operating subsidiaries. Those regulations establish that state laws that obstruct, impair, or condition a national bank’s ability to fully exercise its federally authorized real estate lending powers do not apply to national banks. The regulations specify that state licensing requirements are among the state laws that are inapplicable to national banks and operating subsidiaries.

In ruling in Wachovia’s favor, the district court explained that any enforcement of the state banking laws against Wachovia Mortgage created a conflict with federal law. The court said the Comptroller acted reasonably in issuing a regulation concluding that state law may be applied to an operating subsidiary only to the extent that those laws would apply to the parent national bank if it engaged in the same activities. The Court of Appeals agreed, adding that OCC’s regulations governing real estate lending clearly established that state banking laws could not be enforced against operating subsidiaries that, like Wachovia Mortgage, engaged solely in real estate lending activities.

Blumenthal then asked the Supreme Court to take on the case.

Supreme Court Briefs

Last week, the last of the briefs were filed in the case.

Blumenthal said that if unchecked, the court decision would hit consumers in their pocketbook. He said Connecticut law offers mortgage borrowers greater protections than federal law. He warned that consumer borrowing from mortgage subsidiaries of national banks will lose include prohibitions on prepayment penalties, limits on prepaid finance charges, required disclosure of mortgage fees and protections against unfair and deceptive practices under the ruling.

The attorney general warned that the ruling blocks states from enforcing anti-predatory lending laws against national bank mortgage subsidies, which hold a substantial share of the home mortgage market.

Blumenthal warned that OCC, the federal agency to which consumers would bring complaints, has a poor track record of enforcing consumer protection laws. He also noted in a written statement that the agency has “embarked on a pro-bank campaign to strip states of their regulatory authority and has an inherent conflict of interest because most of its budget comes from fees paid by national banks.”

Blumenthal said the ruling will encourage more mortgage lenders to seek federal charters, further eroding state’s ability to protect consumers from predatory lending.

Both Wachovia Bank and the U. S. Solicitor General, the administration’s top courtroom lawyer, filed briefs asking the Supreme Court not to let the issue go any further. The nation’s high court usually accepts the solicitor general’s advice on whether to hear an appeal.

In its brief arguing against the Supreme Court hearing the case, Wachovia Bank argued that the High Court should not hear the case because every court that had dealt with the issue has ruled that state attempts to regulate operating subsidiaries are barred by federal law and OCC regulations.

Last week, the Solicitor General also filed a brief arguing against the High Court taking up the case. Subjecting an operating subsidiary to state regulations that could not be applied to the parent national bank would impair a national bank’s exercise of its long-settled power under federal law to conduct its banking functions through an operating subsidiary. National banks would have to choose between the benefits of maintaining an operating subsidiary and the benefits of avoiding burdensome state regulations in a manner that would skew decision-making and potentially deter national banks from realizing the efficiencies that an operating subsidiary can provide, the Solicitor General argued.

The justices are expected to decide in June whether they will hear the case.

Lisa D. Burden is a legal analyst for 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:

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