Alert

Federal Preemption of State Regulations in Texas

Summer 2007

In April, the United States Supreme Court ruled on an important question concerning state regulation of mortgage lending that brings the issue of federal preemption of state regulation of the financial services industry to the forefront.

The case before the Court, Watters v. Wachovia Bank, N.A., 127 S.Ct. 1559 (2007), involved Wachovia Mortgage Co., a wholly-owned subsidiary of Wachovia Bank, N.A. licensed by the Office of the Comptroller of the Currency (OCC). Doing business in Michigan, Wachovia Mortgage registered with the State’s Office of Insurance and Financial Services (OFSI) as required by Michigan law, and was under supervision by the OFSI. Once Wachovia Mortgage became a wholly-owned subsidiary of Wachovia Bank, it surrendered its state registration, contending that the National Bank Act and OCC regulations preempt Michigan’s lending laws as applicable to operating subsidiaries of national banks. When Michigan declared Wachovia Mortgage could not do business in the state any longer, Wachovia filed suit.

The Supreme Court, affirming the trial court’s and the Sixth Circuit’s decisions, agreed with Wachovia that operating subsidiaries of national banks are not subject to multi-state control where the national bank itself is not. Focusing on the National Bank Act’s purpose of shielding “national banking from unduly burdensome and duplicative state regulation,” the Court also held that banks have incidental authority to do business through their operating subsidiaries. While acknowledging that states do have some ability to regulate national banking, it noted “when state prescriptions significantly impair the exercise of authority, enumerated or incidental under the NBA, the State’s regulations must give way.”

The Wachovia case highlights the tendency of the courts to find that federal financial services legislation preempts similar state legislation. In 2005, the Texas House of Representatives commissioned a study by the Finance Commission of Texas and the Credit Union Commission of Texas to examine what state laws may be preempted by federal legislation. The report identified several areas which have been shown to be preempted or are likely preempted. These laws include: The prohibition on a bank charging a fee to cash a check drawn on that bank. The Fifth Circuit specifically held that this legislation is preempted by the OCC regulation allowing national banks to charge their customers non-interest charges and fees.

The requirement that banks which do not return canceled checks to customers must provide at least two items per statement cycle free of charge.

Same preemption issue.

The requirement that lenders post notices for customers that certain loan agreements must be in writing. The report suggests that this might be preempted by OCC regulations prohibiting state regulation that has more than an incidental affect on the exercise of national bank powers.

Interest regulations under the Texas Finance Code.

The penalties, remedies, and cure provisions are radically different from federal law. After the 2003 United States Supreme Court case we know that federally insured institutions and their subsidiaries are exempted from these Texas provisions. The prohibition against printing more than the last four digits on any credit card or debit card receipt. Federal law may preempt this rule as it allows up to the last five digits to be printed on such receipts.

The report also indicates that Texas Finance Code’s Title 4 regulations on interest, loans, and financed transactions may only apply to state banks. The Commissions made no recommendation as to what action the legislature should take regarding possible preempted laws. Rather, it suggested that the legislature might allow such laws to stay on the books if they present sound public policy as they might later be given new life through federal action or litigation.