Preemption Creep

When the US Sixth Circuit Court of Appeals recently overturned a district court decision, and held that State Farm's federal saving bank's "exclusive agents" who act as mortgage loan originators are not subject to state licensing by the state of Ohio, it came as no surprise to us. We never bought the district court's allegation that an opinion letter of the OTS that interpreted federal law was a "legislative rule" that required the OTS to follow the Administrative Procedures Act. The OTS was merely interpreting the law as it applied to a specific set of facts, not issuing a new regulation. The Court rejected that approach and decide that Ohio law was preempted by federal law based upon the Court's de novo of applicable law and regulation.

While the Court observes in a footnote that State Farm's agents may eventually be subject to state licensing in accordance with the requirements of the recently enacted Housing and Economic Recovery Act of 2008 (“the HERA”), the extent of state regulation will have to await the enactment of the necessary Ohio implementing legislation, which may be a year off. In the meantime, the exclusive agents need to eat and the federal savings bank needs to make loans (although, we hope, only the most fair and balanced mortgage loans). In addition, the Court apparently wanted to state in no uncertain terms that the march of federal preemption slogs onward, grinding the rights of the states beneath its jackboot heel. Or. something like that.

Actually. the Sixth Circuit panel relied heavily upon the approach of the US Supreme Court in Watters v. Wachovia. As did the SCOTUS with respect to national banks, the Sixth Circuit focused on the effect of state law on the exercise of a federal savings powers, not on the corporate structure through which the bank exercised those powers.

Properly understood, Watters stands for the proposition that when considering whether a state law is preempted by federal banking law, the courts should focus on whether the state law is regulating “the exercise of a national bank’s power” not on whether the entity exercising that power is the bank itself. Id. at 1570.

The federal savings bank was exercising its power to originate mortgage loans through exclusive agents. The Ohio licensing law impeded the bank in the exercise of those powers. Therefore, the Ohio law was preempted. It was as simple as that.

The Court also observes in a footnote that it's not deciding the question of whether or not the Ohio law might apply to non-exclusive agents of federal savings banks. Although the sweep of the Court's opinion (and of the Wachovia opinion, for that matter) is broad, it's logical to conclude that a non-exclusive agent that is not working exclusively for federal savings banks and/or national banks, but for non-federal loan originators, as well, would be subject to licensing by the state. It would be a Rubik's cube of "parsing the nuances" to try to allocate the extent of preemption and non-preemption where such "non-exclusive agents" were involved, and it would be tough to argue preemption in such a case (although I could do it with a straight face if paid a sufficient hourly rate).

Nevertheless, this latest decision gives more ammunition to those states rights advocates who legitimately ask, as did a correspondent whose plaintive cry was noted in a previous post: "Where does this all end?"

I think we all know the answer to that question, don't we?