The Supreme Court this week will hear arguments in a case that could limit the power of states to impose their own stricter standards on the mortgage lending subsidiaries of federally chartered banks.

The case, Watters v. Wachovia Bank, began as a dispute between Michigan regulators and Wachovia Bank. Wachovia argued that its state-chartered Wachovia Mortgage subsidiary was subject to regulation only by the federal government, through the Office of the Comptroller of Currency (OCC).

The OCC in 2001 ruled that federal law preempts states from regulating state-chartered subsidiaries of national banks. Wachovia has prevailed in District and Circuit Court decisions, and in cases involving other banks courts have stood behind the OCC’s interpretation of the National Banking Act.

That the Supreme Court has agreed to hear the case has generated speculation that it could take a different approach in defining to what extent federal regulations may trump state and local laws, the Washington Post reported.

Legal scholars say that if Wachovia prevails, other industries could argue for federal preemption from state and local laws such as those governing auto emissions, product safety and workplace standards.

The banking industry has filed briefs in favor of Wachovia, arguing that allowing states to regulate the subsidiaries of federally chartered banks creates a patchwork of regulations that makes it more burdensome and costly to do business. If Michigan prevails, banking industry officials say, some national banks might close their subsidiaries, restricting credit and increasing its cost.

Every state in the nation has sided with Michigan regulators, saying states can better protect consumers against predatory lending practices. States argue that banks would rather fall under the umbrella of federal regulators because the OCC is more concerned with protecting depositors than borrowers.

A spokesman for Michigan Attorney General Mike Cox told Bloomberg News that Congress has not given the OCC the authority to preempt state corporations. Rep. Barney Frank, D-Mass., who is in line to become chairman of the House Financial Services Committee, has sponsored legislation to limit the OCC’s ability to preempt state consumer protections.

Source:

http://www.inman.com/inmannews.aspx?ID=59489