State-Chartered Subsidiary of National Bank Is Not Subject to State Regulatory Supervision
April 7, 2006
Michael Weissman - Chicago
The current clash between state and federal regulatory officials is demonstrated by Wachovia Bank, N.A. v. Watters, 431 F. 3d 566 (2005). The issue was whether the Michigan banking laws concerning the operating subsidiaries of national banks were preempted by the National Bank Act and the regulations of the Comptroller of the Currency. The court held that they were, citing other recent cases that had reached the same conclusion, i.e., Wachovia Bank v. Burke, 414 F.3d 305 (2nd Cir. 2005), Wells Fargo Bank v. Boutris, 419 F. 3d 949 (9th Cir. 2005), and National City Bank v. Turnbaugh, 367 F. Supp. 2d 805 (D. Md. 2005).
The laws that the Commissioner of the Michigan Office of Insurance and Financial Services sought to apply to Wachovia’s subsidiary (Wachovia Mortgage) required the subsidiary to register with the state, provide an annual financial statement, pay an annual operating fee, maintain certain documents and retain those documents for examination by the Commissioner.
On April 3, 2003, in a direct challenge to the Commissioner, Wachovia Mortgage advised the Commissioner that it was terminating its Michigan registration. In response, the Commissioner told Wachovia Mortgage that effective July 1, 2003, it would no longer be authorized to conduct mortgage lending in Michigan.
Wachovia then sued to obtain a declaration that the Michigan regulatory statutes were preempted by the National Bank Act and the regulations of the Comptroller of the Currency that grant the Comptroller visitorial powers over national banks.
One of the Comptroller’s regulations (12 C.F.R. §5.34(e)(l)) permits an operating subsidiary of a national bank to engage in the same activities that are permissible for its parent. Another regulation states that an operating subsidiary of a national bank conducts its activities subject to the same terms and conditions that apply to its parent (12 C.F.R. §5.345.34(e)(3)). Still another of the Comptroller’s regulations provides that a state cannot obstruct a national bank’s authority to conduct the business of banking by imposing laws and regulations on its operating subsidiary that it could not impose on the national bank itself (12 C.F.R. §7.4006).
Based on the foregoing regulations, the court held the Michigan regulatory scheme had been preempted.
What’s the Point?
Recent clashes between state regulators and national banks that invoke federal preemption have almost universally resulted in a ruling that favors federal preemption.
For more information, e-mail Michael L. Weissman at michael.weissman@hklaw.com or call toll free, 1-888-688-8500.