The Supreme Court ruled yesterday that the federal government, not the states, has authority over subsidiaries of national banks.
The ruling is a victory for the 1,600 national banks that say they and their subsidiaries should not be subjected to conflicting federal and state regulations that can vary from state to state.
Writing for the 5-3 majority, Justice Ruth Bader Ginsburg said “we have never held” that federal regulators’ authority “extends only to a national bank itself.”
“We have treated operating subsidiaries as equivalent to national banks,” Justice Ginsburg said.
She was joined by Justices Anthony M. Kennedy, David H. Souter, Stephen G. Breyer and Samuel A. Alito Jr.
The ruling won widespread support among large banks, the Bush administration and some private groups, such as the AARP senior citizens lobby, that said a regulatory framework that includes the 50 states as well as federal bank examiners can better protect millions of consumers than multiple laws.
“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 and preserves our industry’s competitive structure,” said Edward L. Yingling, president of the American Bankers Association, a trade group for large banks.
The number of national bank subsidiaries has grown to about 500 in recent years and range from mortgage lending to issuing credit cards to financing used cars.
States can continue to regulate national bank subsidiaries for financial issues that do not conflict with federal regulations, such as customer service.
National banks in the United States have $6 trillion in assets. Wachovia Bank, which filed the suit against Michigan regulators, is the fourth-largest in the country.
The case started in 2003 when Wachovia Mortgage Corp. announced it was surrendering its mortgage registration in Michigan because it was no longer subject to state laws. Michigan’s financial services regulator, Linda Watters, told Wachovia Mortgage it could not operate there without the registration.
Wachovia sued, saying a 2002 regulation adopted by the U.S. Office of the Comptroller of the Currency allowed the bank to operate without state oversight.
All of the other 49 states came to Michigan’s defense, saying federal rules pre-empting the states’ regulatory role are far too broad.
In a dissent, Justice John Paul Stevens said the court’s decision “threatens the vitality of most state laws as applied to national banks.” Joining him were Chief Justice John G. Roberts Jr. and Justice Antonin Scalia. Justice Clarence Thomas abstained from the vote.
State regulators said the ruling is a loss for consumers as they try to protect them from abusive lenders.
“It opens the way for the continuation of the consumer abuse that is prevalent under this kind of pre-emption authority,” said Charles Turnbaugh, Maryland’s commissioner of financial regulation.
State laws that regulate high interest rates or late fees on credit cards from national banks could be overridden, or pre-empted, he said.
Joe Face, Virginia’s commissioner of financial institutions, said homeowners who pay off their mortgages early could be forced to pay higher penalties than the Virginia limit of 2 percent of the loan amount.
“If pre-empted, any pre-payment penalty could be charged,” Mr. Face said.
The District’s Department of Insurance, Securities and Banking officials said the ruling would have little effect on banks or consumers.
The comptroller disagreed that customer service would suffer.
c This article is based in part on wire service reports.
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