High court curbs states' power over some banks

April 18, 2007|By BLOOMBERG NEWS

WASHINGTON -- The U.S. Supreme Court has limited the power of states to oversee financial institutions, ruling that Michigan can't regulate the mortgage-lending subsidiaries of Wachovia Corp. and other federally chartered banks.

The justices, voting 5-3, said yesterday that banks regulated by the U.S. Office of the Comptroller of the Currency have a broad shield from additional state scrutiny.

Calls have been made for tighter regulation of the mortgage business because of the subprime lending crisis.

The ruling spares so-called national banks -- Wachovia, National City Corp. and Wells Fargo & Co. among them -- from what they said would be a patchwork of rules around the country.

Michigan laws require mortgage lenders to register with the state, pay annual fees, submit financial statements and keep records for examination purposes. At least six states, including California and Florida, have similar regulations.

"Federal control shields national banking from unduly burdensome and duplicative state regulation," Justice Ruth Bader Ginsburg wrote for the majority.

The case centered on the U.S. National Bank Act, which pre-empts states from regulating the activities of national banks. The issue was whether that principle applies when banks take advantage of the other legal protections they get by setting up subsidiaries.

A regulation from the comptroller, backed yesterday by the court, says subsidiaries are shielded from state oversight as their parents are.

"A national bank has the power to engage in real estate lending through an operating subsidiary, subject to the same terms and conditions that govern the national bank itself," Ginsburg wrote. "That power cannot be significantly impaired or impeded by state law."

In his dissent, Justice John Paul Stevens wrote, "The federal interest in protecting depositors in national banks from their subsidiaries' liabilities surely does not justify a grant of immunity from laws that apply to competitors. He said the comptroller's rule could "drive companies seeking refuge from state regulation into the arms of federal parents."

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