The Sixth Circuit Court of Appeals has recognized expanded preemption rights for federally-chartered institutions to include "exclusive agents" of a federal savings bank (here controlled by an insurance company) in State Farm Bank, FSB v. Reardon.
In the underlying case, the Ohio Division of Financial Institutions ("ODFI") sought to cause agents of State Farm Bank, FSB (a federal savings bank regulated by the Office of Thrift Supervision; "State Farm Bank") to be licensed as mortgage brokers under relevant provisions of Ohio mortgage broker law.
State Farm Bank (and one of its agents) disagreed, arguing that the state licensing and regulation of State Farm Bank "exclusive agents" was preempted by federal law, and that the Office of Thrift Supervision ("OTS"), as the primary federal regulator for State Farm Bank, authorized this type of activity.
While the ODFI and other state agencies have long-recognized the concept of preemption for federally-chartered banking institutions and their operating subsidiaries, the concept had not been extended to the many "agents" of such institutions in this context, particularly those affiliated with the traditional "agent" sales and marketing structures of insurance organizations. It is important to keep in mind that the decision is not limited to "exclusive agents" in the insurance marketing context, but rather would appear to apply to "exclusive agents" of any federally-chartered institution irrespective of its industry affiliation. Presumably anyone acting as an "exclusive agent" for a federally-chartered institution would then be exempt from state law and regulation that may be deemed to interfere with the exercise of its federally-authorized "powers".
The Court found that since the concept of preemption extends to the powers of federally-chartered institutions, the agent relationship provided the same analogy as operating subsidiaries and should likewise be preempted in terms of application of state law. The Court also relied on a New Hampshire case which extended preemption to the sale of giftcards by a national bank and a federal thrift through an "agent" (a national mall operator).
The decision represents a potentially significant expansion of the preemption doctrine even over a state law which is clearly intended to regulate and license the activities of non-bank employee mortgage lenders. The industry impact could be significant if extrapolated to other products and services, and appears to expand direct competition with banks and with mortgage brokers who are otherwise required to be state-licensed and regulated.
Interestingly, the decision acknowledges the potential licensing requirements of pending federal legislation (which may moot the decision in whole or in part). And the Court specifically left open the question of whether pre-emption applies to non-exclusive agents (i.e. those who may also act as agents for other mortgage lenders or, in this case, for other insurance companies). The decision also goes to some length to recognize that the State Farm Bank agents are trained by State Farm Bank and subject to State Farm Bank and OTS oversight, in effect treating them like bank employees for these purposes.
In the meantime, the decision represents a potentially significant expansion of the concept of federal preemption to exclusive agents of federally-chartered institutions, which may or may not be affiliated with insurance organizations.
The impact on products and services that may be offered by such "exclusive agents" outside of state regulation and licensing under the preemption umbrella will be interesting for both the banking and the insurance industries.