High Court Rules Against State Regulation of Home Lending

Michigan's attempt to apply stricter mortgage banking rules suffered a defeat when the U.S. Supreme Court ruled on Tuesday that states cannot regulate home lending by a subsidiary of a national bank.

The court voted 5-3, upholding a U.S. appeals court ruling that sided with Wachoviaand said that federal law and regulation by the Office of the Comptroller of the Currency (OCC) preempted state regulation.

"We hold that Wachovia's mortgage business, whether conducted by the bank itself or through the bank's operating subsidiary, is subject to OCC's superintendence, and not to the licensing, reporting and visitorial regimes of the several states in which the subsidiary operates," Justice Ruth Bader Ginsburg wrote for the court majority.

The ruling comes at a time when the U.S. mortgage market has been roiled by worries over rising default rates in subprime mortgages to borrowers with poor credit histories.

To mitigate an expected tsunami of foreclosures, U.S. banking regulators and lawmakers are exploring ways to help millions of subprime mortgage holders from losing their homes and are seeking a national crackdown on predatory lending, a main cause of the subprime crisis. (For more about the subprime mortgage crisis.

Banks Pleased

Banks said they were pleased with the Supreme Court decision.

"Avoiding a patchwork of duplicative and conflicting federal and state regulation makes it easier for national banks to grant credit to customers across state lines," said Ed Yingling, president of the American Bankers Association.

Michigan, supported by all 49 other states, had argued that state regulation was necessary to protect consumers from abusive, deceptive and predatory mortgage lending practices.

The U.S. Justice Department supported the Charlotte, North Carolina-based Wachovia. It said federal regulation gives federal officials exclusive regulatory authority over national banks and their operating units.

Michigan wanted Wachovia Mortgage Corp. to register with the Michigan Office of Insurance and Financial Services, but Wachovia contended that it and its subsidiary are regulated by the federal OCC. In 2001, the OCC issued a rule that federal banking agencies regulate subsidiaries of national banks, putting regulation of mortgage units under federal control.

After Michigan said the Wachovia unit could not continue providing mortgage products without state registration, the company sued. Wachovia won in both federal district court and in federal appeals court.

Justice Ginsburg concluded that regulation of national bank operations falls within the powers that Congress has under the Constitution. "State regulators cannot interfere with the 'business of banking' by subjecting national banks or their OCC-licensed operating subsidiaries to multiple audits and surveillance under rival oversight regimes," she wrote.

Three justices dissented, saying Congress did not give the OCC the authority to preempt state law.

"Although the dual banking system's main virtue is its divergent treatment of national and state banks, Congress has consistently recognized that state law must usually govern the activities of both national and state banks for the dual banking system to operate effectively," Justice John Paul Stevens wrote in a dissent. He was joined by Chief Justice John Roberts and Antonin Scalia.