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HSH occasionally receives calls regarding lenders who aren't licensed or registered by a state banking department. The reason is that lenders which are national banks are generally assumed exempt from state regulation. National banks are regulated by the Office of the Comptroller of the Currency (OCC) and states are thus preempted from overseeing national bank activity. National banks are not required to register or abide by state regulations.
Several recent circuit court decisions have upheld federal preemption and consequently current HSH policy is to accept National Banks and their subsidiaries for inclusion in its ShowCases and/or related advertising remains but it may well change, subject to pending court decisions. Subsidiaries of national banks are also exempt, which can be confusing because subsidiaries often have a different name than their parent. Let's say "Gopher Mortgage" has operated for several years as a state chartered company lending only in states where it has obtained a license. If it is then purchased by a national bank, Gopher may now proceed to advertise and lend mortgages in all 50 states.
The defining preemption document is "Activities Permissible for a National Bank", issued by the Office of the Comptroller of the Currency (OCC). It is a very readable document - not legalese - and the complete PDF source document may be found at www.occ.treas.gov/corpapps/BankAct.pdf.
In general, Activities Permissible for a National Bank states that federal preemption of state law restrictions applies to all activities of national banks, whether conducted at branches or non-branch facilities, or through operations over the Internet. Moreover, state laws only apply to national bank operating subsidiaries to the same extent that those laws apply to the national bank itself, that is, state restrictions or conditions, including licensing requirements, do not apply to the national bank operating subsidiary.
At this writing (02/07) the preemptions asserted under Activities Permissible for a National Bank have been upheld in several District Courts. One, however, the 6th Circuit decision in 05-1342 Watters v. Wachovia Bank, is docketed for an April 21st hearing by U.S. Supreme Court (See below).
On April 17, the court ruled in favor of the OCC and against Watters and the State of Michigan. The result is that national banks and subsidiaries of national banks are, in effect, exempt from state and local regulation. It's not yet clear exactly what this means to mortgage markets, but it will probably pave the way for greater expansion of bank-owned mortgage companies (once the mortgage market recovers, probably in time for the next boom).
05-1342 WATTERS V. WACHOVIA BANK
DECISION BELOW:431 F3d 556
Cert. Granted 6/19/2006
QUESTIONS PRESENTED:
1. 12 USC § 484(a) of the National Bank Act limits visitorial powers over "national banks" except as authorized by federal law. National banks are defined and created under the National Bank Act. State-chartered nonblank operating subsidiaries of national banks are created under State corporate law. The Comptroller of the Currency, by Rule 12 CFR 7.4006, made 12 USC § 484(a) equally applicable to State- chartered nonbank "operating subsidiaries" of national banks. Is the interpretation of the Comptroller of the Currency that 12 CFR 7.4006 preempts Michigan's laws regulating mortgage lending as applied to State chartered nonbank operating subsidiaries, entitled to judicial deference under Chevron USA, Inc v Natural Resources Defense Council, 467 US 837 (1984)?
2. A national bank has been declared to be a national corporation in Guthrie v Harkness, 199 US 148, 159 (1905). 12 CFR 7.4006 treats a State- chartered nonbank operating subsidiary of a national bank as equivalent to a national bank and, thus, as a national corporation. The Tenth Amendment to the United States Constitution is violated to the extent a statute permits the conversion of State corporations into federal ones in contravention of the laws of the place of their creation. Hopkins v Federal Savings & Loan Ass'n v Cleary, 296 US 315, 335
Related decisions:
American Bankers Association, et al. v. Bill Lockyer, et al., No. 04-16334 (9th Circuit)
Horton, et al., Plaintiffs/Counter-Defendants/Appellants, v. Bank One, N.A., et al., Defendants/Counter-Plaintiffs/Appellees No. 03-50865 (5th Cir.)
Scott and Janet Brannam v. The Huntington Mortgage Co. No. 00-40439-CH (Muskegon (MI) County Circuit Court)
WACHOVIA BANK, N.A. et al. v. LINDA A. WATTERS, Commissioner of the Michigan Office of Insurance and Financial Services, No. 5:03-CV-0105 (W.D. Mich.)
WACHOVIA BANK, N.A. et al. v. JOHN P. BURKE, Banking Commissioner of the
State of Connecticut, No. 3:03CV0738 JCH (D. Conn.)
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