Kelo v. City of New London DaimlerChrysler v. Cuno
In Watters v Wachovia, the Supreme Court ruled that states do not have the right to regulate state-chartered affiliates of nationally chartered banks. Wachovia Corp. challenged this notion when it moved a subsidiary, Wachovia Mortgage, from its direct control to that of Wachovia Bank, a federally chartered national bank. That status, it argued, and the fact that it is now regulated by the federal Office of the Comptroller of the Currency, exempted it from state regulation. The Supreme Court agreed.
Writing for the majority, Justice Ruth Bader Ginsburg said, the National Bank Act "specifically authorizes federally chartered banks to engage in real estate lending. It also provides that banks shall have power '[t]o exercise…all such incidental powers as shall be necessary to carry on the business of banking.' Among incidental powers, national banks may conduct certain activities through 'operating subsidiaries,' discrete entities authorized to engage solely in activities the bank itself could undertake, and subject to the same terms and conditions as those applicable to the bank."
Many in the real estate industry--as well as consumer and affordable housing advocates--did not agree. Their stance is that state laws are necessary to prevent certain activities, such as predatory lending. Federal law, their argument goes, can be a weaker standard.
"Robust state enforcement activity is necessary because federal banking agencies are not adequately pursuing consumer complaints," says Lauren Willis, an associate professor at Loyola Law School Los Angeles and one of a group of law professors who signed an amicus brief supporting state regulation.
"Until recently, the OCC had announced only one action against a federally chartered lender or subsidiary for mortgage lending abuses, although it doubled that number earlier this month. The agency obtained $100,000 in the first action and $14 million in the second," she says.
The National Association of Realtors, which has also been supportive of state powers to legislate nationally chartered banks expressed concerns that this decision could pave the way for similar actions in related industries.
"With national banks now operating in the insurance and securities industries, and continuing their push to enter into real estate transactions, I am concerned about the implications of this ruling for our industry," says Pat Vredevoogd Combs, 2007 NAR president. "This could mean that, should banks ever be permitted to broker real estate the OCC may likewise claim a similar exemption from state real estate regulations for operating subsidiaries engaged in brokerage."
The upside of the ruling, proponents say, is that it will lead to lower borrowing costs for both residential and commercial construction.
"With one set of standards, lending becomes more streamlined and these savings are passed along to borrowers," Richard Segal, a litigation partner at Pillsbury Winthrop Shaw Pittman, tells GlobeSt.com.
The decision fosters uniform standards for national banks operating through subsidiaries, Marshall Fishman, a litigation partner at the law firm Kramer Levin Naftalis & Frankel LLP in New York, agrees. "Rather than have banks incur the costs of complying with many different regulations it is more efficient for the banks to adhere to one."
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Erika Morphy
Erika Morphy has been writing about commercial real estate at GlobeSt.com for more than ten years, covering the capital markets, the Mid-Atlantic region and national topics. She's a nerd so favorite examples of the former include accounting standards, Basel III and what Congress is brewing.
