It has been an intense battle fought in multiple courtrooms and argued on editorial pages and in banking circles throughout the country. The fi nal arguments took place in late 2006 before the Supreme Court. That is when the Supreme Court heard oral arguments involving Wachovia Bank and its failure to register its mortgage subsidiary with the State of Michigan. When the Supreme Court renders its decision this spring, the question will receive its fi nal answer. That question is whether a subsidiary of a national bank engaged in mortgage banking activity is subject to registration, supervision and examination by state authorities.
So far, three United States Courts of Appeals have considered the question. Each one of these courts has concluded that a state has no such registration, supervision or examination power over a national bank subsidiary. This has deterred neither the state attorneys general nor the state banking commissioners. Over thirty state attorneys general have signed on to an amicus brief urging the Supreme Court to reverse the decisions of the lower courts and fi nd that a state may supervise the affairs of an operating subsidiary of a national bank.
The State of Michigan is not challenging the idea that a national bank needs not register with the state in order to engage in mortgage banking activity. That question is and has been settled for a long time. A national bank is exempt from supervision by state authorities. Congress has stated that only the Offi ce of the Comptroller of the Currency (“OCC”) has the right to exercise “visitorial powers” over a national bank. No state law attempting to subject a national bank to the examination and supervision of state authorities has ever survived judicial scrutiny. Once Congress has spoken defi nitively on a subject, such as who may examine a national bank, no state authority may decide otherwise.
Rather, the State of Michigan is challenging whether the OCC can extend the doctrine of preemption beyond a national bank itself to a legally separate entity that is owned by the national bank. The OCC argument is that a national bank is not limited to engaging in only the specifi c enumerated powers listed in the statutes, but that Congress also gave a national bank the power to engage in activities that are convenient or useful to those specifi cally enumerated activities. The OCC has determined that it is convenient and useful for a national bank to operate through an operating subsidiary, so long as the activities conducted in such a manner are the same activities as are permissible for the national bank itself. Thus, the OCC reasons, a state may not regulate an operating subsidiary of a national bank.
Getting beyond the legal fine points of these arguments, the question remains: does all of this make any difference, or is this just attorneys arguing about fl y specks?
It makes a difference. To begin with, there can be no real argument that the operating subsidiary structure is a convenient and useful mechanism for a bank. Due to its separate corporate structure, an operating subsidiary can help shield a parent bank from thirdparty liability. When an activity involves inherent risk, such as the operation of an insurance agency or the ownership of property acquired in satisfaction of a debt previously contracted, it is a prudent business practice to conduct the activity outside of the bank structure and in a subsidiary. In addition, the separate legal status of a subsidiary allows for greater fl exibility in the event the parent bank decides to exit that particular business line. It is far easier to spin off a separately incorporated subsidiary than to sell an unincorporated division of a bank.
If the Supreme Court chooses to follow the trend of the last twenty-fi ve years, it will fi nd in favor of the OCC and Wachovia Bank. The OCC is justifi ably proud of its record before the Supreme Court. Whether the subject has been brokerage, branching or insurance, the OCC has an impressive record of victories before the Supreme Court. At the same time, it is a different Court today than only a few years ago.
A decision adverse to Wachovia could unleash a fl ood of litigation against some of the largest banks in the country. Those banks have been relying upon OCC regulations as authority for the premise that their mortgage subsidiaries were not subject to state law rules that might govern such things as the amounts they might charge for late fees or returned checks. A reversal by the Supreme Court could expose those institutions to perhaps hundreds of millions of dollars in damages. Compliance costs for those institutions would also soar, since they would now have to comply with the laws of each state, or transact mortgage business directly through the bank.