Amicus Curiae Brief — Watters v. Wachovia Bank, NA

Cas Ne. 2.

Supreme Court of the Gnited States—

¢

LINDA A. WATTERS, COMMISSIONER,

MICHIGAN OFFICE OF INSURANCE

AND FINANCIAL SERVICES,

Petitioner,

V.

WACHOVIA BANK, N.A., et al.,

Respondents.

+

On Writ Of Certiorari To The

United States Court Of Appeals

For The Sixth Circuit

S

BRIEF AMICI CURIAE OF AARP, CENTER

FOR RESPONSIBLE LENDING, CONSUMER

FEDERATION OF AMERICA, CONSUMERS

UNION, FAIR HOUSING JUSTICE CENTER,

NATIONAL ASSOCIATION OF CONSUMER

ADVOCATES, NATIONAL ASSOCIATION OF

CONSUMER AGENCY ADMINISTRATORS,

NATIONAL COMMUNITY REINVESTMENT

COALITION, NATIONAL CONSUMER LAW

CENTER, PUBLIC CITIZEN, TRIAL LAWYERS

FOR PUBLIC JUSTICE, U.S. PUBLIC INTEREST

RESEARCH GROUP, AND PROFESSORS OF LAW*

IN SUPPORT OF PETITIONER

¢

KATHLEEN KEEST AMANDA QUESTER

ELLEN HARNICK Counsel of Record

CENTER FOR RESPONSIBLE CENTER FOR RESPONSIBLE

LENDING LENDING

302 West Main Street 910 17th Street, NW, Suite 500

Durham, NC 27701 Washington, DC 20006

(919) 313-8548 (202) 349-1872

September 1, 2006

|* Amici Professors Of Law Are Identified On Inside Cover]

COCKLE LAW BRIEF PRINTING CO (800) 225-6964

OR CALL COLLECT (402) 342-2831

Amici Professors of Law

PRENTISS Cox

Associate Professor of

Clinical Law

UNIVERSITY OF MINNESOTA

LAW SCHOOL -

VINCENT D1 LORENZO

Professor of Law

St. JOHN’S UNIVERSITY

SCHOOL OF LAW

KATHLEEN C. ENGEL

Associate Professor of Law

CLEVELAND-MARSHALL

COLLEGE OF LAW

LINDA E. FISHER

Professor of Law

SETON HALL UNIVERSITY

SCHOOL OF LAW

ANN GRAHAM

Associate Professor of Law

TEXAS TECH UNIVERSITY

SCHOOL OF LAW

CASSANDRA JONES HAVARD

Associate Professor

UNIVERSITY OF BALTIMORE

SCHOOL OF LAW -

PATRICIA A. McCoy

Professor of Law —

RICHARD D. MARSICO

Professor of Law

NEw YORK LAW SCHOOL

CHRISTOPHER L. PETERSON

Associate Professor of Law

UNIVERSITY OF FLORIDA,

LEVIN COLLEGE OF LAW

KATHERINE PORTER

Associate Professor of Law

UNIVERSITY OF IOWA

COLLEGE OF LAW

Davib J. REISS

Associate Professor of Law

BROOKLYN LAW SCHOOL

FLORENCE WAGMAN ROISMAN

J. Skelly Wright Fellow

YALE Law SCHOOL

William F. Harvey

Professor of Law

INDIANA UNTVERSITY

SCHOOL OF LAW —

INDIANAPOLIS

MICHAEL P. SENG

Professor

THE JOHN MARSHALL

Law SCHOOL

-~ ~LAUREN E. WILLIS

UNIVERSITY OF CONNECTICUT Associate Professor of Law

SCHOOL OF LAW

TAYYAB MAHMUD

Visiting Professor

SEATTLE UNIVERSITY

SCHOOL OF LAW

CaTHY LESSER MANSFIELD

Professor of Law

DRAKE UNIVERSITY LAW SCHOOL

LOYOLA LAW SCHOOL,

Los ANGELES

LLOYD T. WILSON, JR.

Associate Professor of Law

INDIANA UNIVERSITY

SCHOOL OF LAW —

INDIANAPOLIS

TABLE OF CONTENTS

Page

I GT EEE ecxcccncevcetcccsnesinorenecsvevenvenetens iii

INTEREST OF AMICI CURIAE.................::0cssseeeeeeeeeees 1

STATEMENT OF THE CASE ...............ccccccceececeeseesesesees 1

SUMMARY OF ARGUMENT ................:cesseessseneeeeseeeees 3

iicthinrcteinniissnnacnaitecsintiiinitlocbiaiinniealieieciininiectittd 5

I. THE OCC HAS NO AUTHORITY TO INTER-

FERE SO SUBSTANTIALLY WITH THE

STATES’ ABILITY TO PROTECT THEIR

FE vtiscnrtrascrssneineestepeontigtinimniiaueneiadiuaieennsens 5

A. The States Have a Strong Interest in Pro-

tecting Their Citizens in Their Dealings

with State-Chartered Operating Subsidi-

IT iiteiisccsennniinendnnbideidideibidiiaebinieasaieiipisinehiies 6

B. Upholding Section 7.4006 Would Immu-

nize State-Chartered Operating Subsidiar-

. ies from Important Substantive Consumer

IE IID vcincccsidicrniadenandtliataianstatenianedes 7

C. Upholding Section 7.4006 Would Prevent

State Officials from Enforcing Even Many

Non-Preempted State Laws, Despite the

Agencys Own Weak Enforcement Record

I is iiiniicitiganciicinleininisstiiniasteiiinie 11

II. NO DEFERENCE IS DUE BECAUSE THE

PREEMPTION DETERMINATION INVOLVES

PRE GPE GA BAIN sccrstniscesvstentenantasaneooneen 14

Iii. THE COURT SHOULD NOT DEFER TO THE

OCC’S CLAIM OF EXCLUSIVE VISITORIAL

POWERS OVER OPERATING SUBSIDIAR-

IES BECAUSE THE STATUTORY LAN-

Oe ie I vinssictimassisinapiieglhibtinibibenabininmneneiesied 17

il

TABLE OF CONTENTS — Continued

Page

A. Well-Established Common Law Principles

Negate the OCC’s Claim that Operating

Subsidiaries Are the Equivalent of De-

partments or Divisions of Their Parents.... 18

B. Even If Operating Subsidiaries Were

Equivalent to National Banks, Board of

Governors v. Dimension Financial Pre-

cludes the OCC’s Extension of Section 484

to Operating Subsiliaries...................0:0000++ 21

IV. DEFERENCE IS INAPPROPRIATE BE-

CAUSE THE OCC’S READING CANNOT BE

SQUARED WITH CONGRESSIONAL DIS-

APPROVAL OF RECENT OCC OVERREACH-

iii

TABLE OF AUTHORITIES

Page

CASES

ACLU v. FCC, 823 F.2d 1554 (D.C. Cir. 1987)............:000+ 14

AFL-CIO v. Fed. Election Comm’n, 333 F.3d 168

SS SI BR satetenincccnsnsunicpeorsccsecsnsenemejinemninscatiniemnteegin’ 6

Am. Bar Ass’n v. FTC, 430 F.3d 457 (D.C. Cir. 2005)....... 17

Barnett Bank of Marion County, N.A. v. Nelson, 517

Sie, SIRI vinsicsinatiiticsiishininieemensadtiidtanggnetiindeseustetweiinteneneins 16

Bd. of Governors of the Fed. Reserve Sys. v. Dimen-

sion Fin. Corp., 474 U.S. 361 (1986) ............. 4, 18, 21, 22

Buechner v. Farbenfabriken Bayer Aktiengesellschaft,

BEG DDE CBG GE, BIO nccccecccicccccsccssnsctenesvesscossusnsnsseses 19

Charter One Mortgage Co. v. Condra, 847 N.E.2d

SF Gian, GR. Baa. FID ccecrecctcnnsinessopecccnsescncscesnnssnsoesesan 13

Chevron, U.S.A., Inc. v. Natural Resources Def.

Council, Inc., 467 U.S. 837 (1984)........:cccecceseeeeeeees passim

Colo. Pub. Utilities Comm’n v. Harmon, 951 F.2d°

TE Ce cscs rciscttintsctccnnsnnesntnmnitvernmnetavonie 15

Edward J. DeBartolo Corp. v. Fla. Gulf Coast Bldg.

& Constr. Trades Council, 485 U.S. 568 (1988)............... 6

FDA v. Brown & Williamson Tobacco Corp., 529

5 ERT ee a Ce 5,17

First Nat Bank in St. Louis v. Missouri, 263 U.S.

ROE RE SE renee cee riven Sem ae oe OO 22

Gregory v. Ashcroft, 501 U.S. 452 (1991) ..........cccccseeseeeeeeees 6

Hi-Craft Clothing Co. v. NLRB, 660 F.2d 910 (3rd

GPEEE TIPNDTED nc cisnsnecetinstintipidindadncemnedetasonescneneesinsiivepeninennaecstnsets 14

TABLE OF AUTHORITIES — Continued

Page

Minnesota ex rel. Hatch v. Fleet Mortgage Corp.,

181 F. Supp. 2d 995 (D. Minn. 2001).............cccccceseeeeeees 13

Nat'l Bank v. Commonwealth, 76 U.S. 353 (1869) ........... 16

Nat'l City Bank of Ind. v. Turnbaugh, 2006 WL

2294843 (4th Cir. Aug. 10, 2006)...............:cccccccceeeeeeeeeee 10

Nat'l Mining Ass’n v. Sec’y of Labor, 153 F.3d 1264

Ge I: PIED ic.ocssctelsiuesonsnniibiendssiniiiieshinisiinsidididianiaaa 15

OCC v. Spitzer, 396 F.Supp. 2d 383 (S.D.N-Y.

2005), appeal docketed, No. 05-5996cv (2d Cir.

IED wiinsiedncnenioncienanacteapiciimbicdeinlabiiainagiinds Reiter ae 2

Pension Benefit Guar. Corp. v. LTV Corp., 496 U.S.

SR CETTE sivssssinuitisscadsdlagestendateudiahiiidtinddddimiepiiieiaiammiemls, “alia 15

Solid Waste Agency of N. Cook County v. U.S. Army

Corps of Eng’rs, 531 U.S. 159 (2001)...0........ceceeceeeeeeeeseees 6

United States v. Bestfoods, 524 U.S. 51 (1998)........... 18, 19

United States v. Texas, 507 U.S. 529 (1993) .............ceeeeees 19

Wachovia Bank v. Burke, 414 F.3d 305 (2d Cir.

2005), petition for cert. filed, 74 U.S.L.W. 3233

(U.S. Sep. 30, 2005) (No. 05-431) 0... eseesesssereeeeenes 22

Wachovia Bank v. Watters, 431 F.3d 556 (6th Cir.

TID nxccscvcxsoncssntapsiniibadiianleinsciiecmmasitiniiiedaiiaiamesmimaiials 3, 22

Whitman v. Am. Trucking Ass’ns, 531 U.S. 457

CIID ...nncousinssissitsiccsissisaidiegitimeeciatiecmesiia as .. 22

Yoder v. Honeywell, Inc., 104 F.3d 1215 (10th Cir.

ROBT) ....<cssisrscsdssoniacsianieinimnmaa nn 19

TABLE OF AUTHORITIES -— Continued

Page

STATUTES

te III. ncncnnnndsinsitunbemnnanntbentseniecsensten 4, 22

Be Oe IID. .cnccnacteonupnneteqnnneccesnmnnesncctonumenesens 26

I, i rennin eaniitninuenaneenanteneviaaned 23, 25

i racer iisendinidininleinnanindvanepeinentvastininain 25

SII, St ITI iniciniencasenasnctstennsoneetsuneetntotornabtentnntnnensnnet passim

I, 0 III cisnceccrienpnnenntennpuiiianinelisndinasnnemnstieommmannes 8

IIT TTT oo crsinsesicantincamibennentilingtnneneszennniuniocatnnsenans 8

815 Ill. Comp. Stat. 137/1 to 137/175.............cccccceeeeereeeeeees 9

Ga. Code Ann. §§ 7-GA-1 to -138 2.0.0... cece eceeeseeeeeeeneeeeeeeneees 9

Gramm-Leach-Bliley Financial Modernization Act,

Pub. L. No. 106-102, 113 Stat. 1338 (1999) ........ 4, 23, 26

Home Ownership and Equity Protection Act of

1994, Pub. L. No. 103-325, Title I, Subt. B, 108

Se, TTT a nsanittiatsimreaccieiniainnngnmatbemamansnaninsemmedinnsnt 8

Mass. Gen. Laws ch. 183C §§ 1-19.............cccccccceeceeeseeeneeeees 9

N.C. Gen. Stat. §§ 24-1.1A, -1.1E, -2.5, -8, -9, -10.2 ........... 9

Se 9

i ci aaetsraeteberensinnnasionenmnin 9

ee I: REID, Ui Sit icicnenteoctonsitibednivesnsesscannensenstantnncene 9

Riegle-Neal Amendments, Pub. L. No. 105-24, 111

Be TITY sihiipesinentiienttiiiinrncatpatadtanmpnantioneeninpnibisioanenmns 26

Riegle-Neal Interstate Banking and Branching

Efficiency Act of 1994, Pub. L. No. 103-328, 108

BR ee siidaibeliminiebiiabiihielatedi 4, 23

TABLE OF AUTHORITIES - Continued

Page

LEGISLATIVE HISTORY

143 Cong. Rec. S5637 (daily ed. June 12, 1997)

(statement of Sen. D’Amato) ................ccccccccceeeeeeeeeeeeeees 26

143 Cong. Rec. S5638 (daily ed. June 12, 1997)

(statement of Sen. Sarbanes) .............................e.seseesess 26

145 Cong. Rec. E2386-01, 1999 WL 1032747 (Nov.

4, 1999) (statement of Rep. Bliley)......................:.00008 27

Comm. on Fin. Servs., 108th Cong., Views and Esti-

mates on Matters to Be Set Forth in the Concurrent

Res. on the Budget -for Fiscal Year 2005, at 16

(Comm. Print 2004), available at http://financial

services. house.gov/media/pdf/FY 2005%20Views_

| RE ERS SERED i: SPREE CE AR eats rt Nw tae 11

Cong. Review of OCC Preemption: Hearing Before

the Subcomm. on Oversight & Investigations of

‘the House Fin. Servs. Comm., 108th Cong. (Jan.

28, 2004) (statement of Chairwoman Sue Kelly),

available at http://commdocs.house.gov/committees/

bank/hba93717.000/hba93717_O0f.htm........................+- 27

Cong. Review of OCC Preemption: Hearing Before

the Subcomm. on Oversight & Investigations of

the House Fin. Servs. Comm., 108th Cong. (Jan.

28, 2004) (testimony of Julie Williams, OCC First

Senior Deputy Comptroller and Chief Counsel),

avauable at http://commdocs.house.gov/committees/

bank/hba937 17.000/hba93717_O0f.htm.......................... 10

H.R. Rep. No. 103-651 (1994) (Conf. Rep.), re-

printed in 1994 U.S.C.C.A.N. 2068..................00c00005 24, 25

H.R. Rep. No. 103-652 (1994) (Conf. Rep.), re-

printed in 1994 U.S.C.C.A.N. 1977 .............cccccceceeeees 8,10

vii

TABLE OF AUTHORITIES - Continued

Page

REGULATORY MATERIALS

TY OF II iicchctsnsdilibindiperendutinenpiensiineienecaiaiieteiagansnegetaion 2

eee eee passim

SE, 00 Se xcreuntndicesicianttiideitapieandinigrianiiaanstsiipeteapestsammtasitn 2

ee 2

12 C.F-R. § 7.4009......... PEAT REE Lens een soo 2

asian seals nceesinelliaennnnociiaiibamaneninniiia 2

RIDA ectiisiiictpbtdienetemsiinieenetuinmnicsmeninensdniinen 13

49 Fed. Reg. 794 (Jan. 5, 1984) ...................-:ccseeeecessrseeseees 21

66 Fed. Reg. 34,784 (July 2, 2001) .............-ccccceeeeeees 15, 18

68 Fed. Reg. 6363 (Feb. 7, 2003)...............:ccccscsesseeseseeeeeees 15

68 Fed. Reg. 46,119 (Aug. 5, 2003)............ eee 9,15

68 Fed. Reg. 46,264 (Aug. 5, 2003)..........cccccccccccsesesesesseseeess 9

69 Fed. Reg. 1895 (Jan. 13, 2004) ..............ceceeeeeeeeeeereees 3,15

69 Fed. Reg. 1904 (Jan. 13, 2004)... eee passim

OCC, Activities Permissible for a National Bank

2005 (Feb. 2006), http://www.occ.treas.gov/corpapps/

OCC, Annual Report, Fiscal Year 2005, available at

http//www.occ.treas.gov/annrpt/2005Annual Report.

OCC, Consumer Protection News: Unfair and-Decep-

tive Practices, http://www.occ.treas.gov/Consumer/

Unfair.htm (last visited Aug. 28, 2006).....................0. 12

OCC Corporate Decision 97-60, 1997 WL 402653

I i il 7

vili

TABLE OF AUTHORITIES ~ Continued

Page

OCC Interp. Ltr., 1988 WL 282227 (June 7, 1988)........... 20

OCC Interp. Ltr., 1990 WL 362185 (Oct. 26, 1990).......... 20

OCC Interp. Ltr. 277, 1983 WL 54162 (Dec. 21,

ae wtopsnesséeshbeadphonnsesnevesosennysontonepenresocosnesso‘tsin 20

OCC, National Bank Operating Subsidiaries Doing

Business with Consumers (Dec. 31, 2005), http:/

www.occtreas.gov/consumer/Report%20%202006%20

I evccccctsscsrovivecsncsonssestneshitebincnesenontis 7

TREATISES

Fletcher, William Meade et al., Fletcher Cyclopedia

of the Law of Private Corporations (perm. ed.,

IE Gi i cncsishcsniesinercnccnntbtacsagestssendictepedivnsiitingsersecss 18

McCoy, Patricia A., Banking Law Manual (2d ed.

I chogeicindcnbncadihiatabiaedeiad cdibibabiigietbierensdeuamisipecererensniegs 7

OTHER AUTHORITIES

Apgar, William et al., The Municipal Cost of Foreclo-

sures: A Chicago Case Study (2005), http//www.

hpfonline.org/PDF/Apgar-Duda_Study_Full_Version.

Azmy, Baher, Squaring the Predatory Lending

Circle: A Case for States as Laboratories of Ex-

perimentation, 57 Fla. L. Rev. 295 (2005)......... 6, 8, 9, 26

Bagley, Nicholas, The Unwarranted Regulatory

Preemption of Predatory Lending Laws, 79

s FS -§ (§ =a 9, 10, 14

ix

TABLE OF AUTHORITIES — Continued

Blair, Christine E. & Rose M. Kushmeider, Chal-

lenges to the Dual Banking System: The Funding

of Bank Supervision, 18 FDIC Banking Review 1

GED occcastcenssecvvcnatsstaciinbeesscnssccsnesiotmsenisentionmiecdboontensee

Bravin, Jess & Paul Beckett, Friendly Watchdog:

Federal Regulator Often Helps Banks Fighting

Consumers, Wall St. J., Jan. 28, 2002..............:c000+

Di Lorenzo, Vincent, Federalism, Consumer Protection

and Preemption: A Case for Heightened Judicial

Review (St. John’s Legal Studies Research Paper _

#09-0026 2005), http://ssrn.com/abstract=796147 ...

Douglas, William O. & Carrol M. Shanks, Jnsula-

tion from Liability Through Subsidiary Corpora-

tion, 39 Yale Ld. 193 (1929).........ccceeeceeceeeeeereneeeneres

Frontline: Secret History of the Credit Card (PBS

television broadcast Nov. 23, 2004) (transcript avail-

able at http://www.pbs.org/wgbh/pages/frontline/

shows/credit/etc/script html) ..............:scceccceeeeseeeerees

Immergluck, Dan & Geoff Smith, The External

Costs of Foreclosure: The Impact of Single-Family

Mortgage Foreclosures on Property Values, 17

Housing Policy Debate 57 (2006) .............:0.cccceeeerees

Inside Mortgage Finance, The 2006 Mortgage

Market Statistical Annual (2006)................cccc0ee0000

Li, Wei & Keith S. Ernst, Center for Responsible

Lending, The Best Value in the Subprime Market:

State Predatory Lending Reforms (2006), http//www.

responsiblelending.org/pdfs/rr010-State_Effects-

Page

=

TABLE OF AUTHORITIES — Continued

MacDonald, Duncan A., Letter to the Editor,

Comptroller Has Duty to Clean Up Card Pricing

Mess, Am. Banker, Nov. 21, 2003 ..............ccccceeeeeeeees

Peterson, Christopher L., Federalism and Preda-

tory Lending: Unmasking the Deregulatory

Agenda, 78 Temple L. Rev. 1 (2005) .........:...-«. 6, 9, 10, 12

Quercia, Roberto G. et al., Assessing the Impact of

North Carolina’s Predatory Lending Law, 15

Housing Policy Debate 573 (2003) .................0.cccceeee

Quercia, Roberto G. et al., The Impact of Predatory

Loan Terms on Subprime Foreclosures: The Special

Case of Prepayment Penalties and Balloon Pay-

ments (2005), http://www.kenan-flagler.unc.edu/

assets/documents/foreclosurepaper. pdf...............00+..

The Reinvestment Fund, Mortgage Foreclosure Filings

in Pennsylvania (2005), http://www.trfund.com/

Weinberg, John A., Competition Among Bank Regula-

tors, 88 Fed. Res. Bank of Richmond/Econ. Q. 19

GRID <ciccsnsectigcosccessoveseognesnianiniacinieiiiamansetannneeenitiess

Williams, Julie L. & Michael S. Bylsma, On the

Same Page: Federal Banking Agency Enforce-

ment of the FTC Act to Address Unfair and De-

ceptive Practices by Banks, 58 Bus. Law. 1243

GUD tencencctitiansnccccscentcancinenenssectvinmmntetoccnnnseningeiatiaintes

Wilmarth, Arthur E., Jr., The OCC’s Preemption

Rules Exceed the Agency’s Authority and Present

a Serious Threat to the Dual Banking System

and Consumer Protection, 23 Ann. Rev. of Bank-

.8, 10

ing & Fin. Law 225 (2004)...0.....cccscescsssesssseves 974,12, 27

1

INTEREST OF AMICI CURIAE’

Amici curiae are twelve non-profit, public interest

organizations and seventeen law professors concerned

about protecting consumers from abuses in the market-

place. In their work on behalf of consumers and their

scholarship, amici curiae have witnessed the primary role

that states have played in enacting and enforcing laws to

protect consumers from financial institutions’ abusive

practices. Over the past few years, the O.sice of the Comp-

troller of the Currency (“OCC”) has sought to immunize

state-chartered operating subsidiaries of national banks

from the reach of numerous state laws and state law

enforcement. The interest of amici curiae in this case

stems from tueir desire to ensure that customers of state-

chartered operating subsidiaries benefit from the critical

protections afforded by state law and state officials’ en-

forcement efforts.

Sf

STATEMENT OF THE CASE

In this case, respondents seek to prohibit petitioner,

the Commissioner of the Michigan Office of Insurance and

Financial Services, from enforcing Michigan’s mortgage

laws against respondent Wachovia Mortgage, a state-

chartered national bank operating subsidiary. The bases

for respondents’ action are sweeping, interconnected rules

promulgated by the OCC in the past six years that have

' A letter of consent from each of the parties has been filed with

the Clerk of the Court. No couns | for a party authored this brief in

whole or in part, and ro person or entity other than amici curiae made

a monetary contribution to the preparation or submission of this brief.

dramatically undermined the states’ ability to protect their

consumers from abuses by national bank operating sub-

sidiaries.

The OCC’s 2001 operating subsidiary preemption rule

at the heart of this case provides that, “[u]nless otherwise

provided by Federal law or OCC regulation, State laws

apply to national bank operating subsidiaries to the same

extent that those laws apply to the parent national bank.”

12 C.F.R. § 7.4006. In turn, this implicates the current

“visitorial powers” rule, 12 C.F.R. § 7.4000, in which the

OCC redefined its own exclusive jurisdictional reach under

12 U.S.C. § 484 in 2004. The recently amended visitation

rule preyents state regulaters and attorneys general from

examining national banks, inspecting their records, or

prosecuting enforcement actions against them except

pursuant to limited exceptions.” In 2004, the OCC also

expanded the universe of preempted state laws by prom-

ulgating the broad preemption rules now found in 12

C.F.R. § 7.4007 (deposit-taking), § 7.4008 (non-real estate

lending), § 7.4009 (incidental powers), and § 34.4 (real

estate lending) (collectively the “2004 preemption rules”).

According to the OCC, 12 U.S.C. § 484 and the 2004

preemption and visitation rules apply to national bank

operating subsidiaries to the same extent as to their

parent national banks under 12 C.F.R. § 7.4006. 69 Fed.

* 12 C.P.R. § 7.4000. The Second Circuit is currently considering

whether the 2004 visitation rule impermissibly expands the definition

of “visitorial powers” and unduly restricts Section 484’s “courts of

justice” exception, issues that have not been briefed before this Court.

See OCC v. Spitzer, 396 F. Supp. 2d 383, 407 (S.D.N.Y. 2005) (enjoining

the New York State Attorney General from enforcing state fair lending

laws against national banks or their operating subsidiaries), appeal

docketed, No. 05-5996cv (2d Cir. 2005).

3

Reg. 1904, 1913 (Jan. 13, 2004); 69 Fed. Reg. 1895, 1900-

01 (Jan. 13, 2004). In reliance on this interpretation,

Wachovia Mortgage asserts that Michigan has no right to

exercise any oversight under Michigan’s mortgage laws

because supervision is vested exclusively in the hands of

the OCC as io both national banks and the state-chartered

companies they control. The court below ruled in favor of

respondents, incorrectly giving deference to the OCC’'s

position under Chevron, U.S.A., Inc. v. Natural Resources

Defense Council, Inc., 467 U.S. 837 (1984). Wachovia Bank

v. Watters, 431 F.3d 556 (6th Cir. 2005).

¢

SUMMARY OF ARGUMENT

At issue in this case is whether the states will be able

to protect their citizens from abuses by national bank

operating subsidiaries established under the states’ own

charters. The states are uniquely positioned to implement

innovative and rapid responses to abuses. Yet Section

7.4006, together with the 2004 preemption rules, would

immunize operating subsidiaries from important state

laws, such as mortgage lending laws, depriving consumers

of rights and remedies that have no adequate parallel in

federal law. Combined with the OCC’s 2004 visitation rule,

Section 7.4006 would also prevent the fifty states from

utilizing their extensive experience and resources to

enforce those laws that do apply — leaving all enforcement

in the hands of a single federal agency that has shown

little interest in ensuring fairness to consumers. No

deference is due to an interpretation by a self-interested

agency that would undermine consumers’ interests and

state sovereignty in such a significant way.

4

Deference to the OCC in this case is also inappropri-

ate because the preemption determination involves pure

issues of law properly resolved by the judiciary. The OCC’s

rules are premised on a number of legal errors, including

its failure to follow decisions of this Court that it pur-

ported to distill.

The unambiguous language of 12 U.S.C. § 484 — which

grants the OCC exclusive visitorial powers only as to “na-

tional bank{s]” — precludes deference to the OCC’s assertion

of exclusive visitorial powers over operating subsidiaries.

The OCC’s effort to circumvent this statutory language by

claiming that state-chartered operating subsidiaries are the

equivalent of departments or divisions of their parent banks

contradicts basic principles long-settled in the common law.

The asserted equivalence is, in any event, irrelevant under -

this Court’s decision in Board of Governors of the Federal

Reserve System v. Dimension Financial Corp., 474 U.S. 361

(1986). This Court’s precedents also preclude the OCC’s

attempt to rewrite the specific terms of Section 484 through

its interpretation of the “incidental powers” provision, 12

U.S.C. § 24 (Seventh).

Even if the Court were to find an ambiguity in the

National Bank Act (“NBA”), the OCC would not be entitled

to deference because its position is neither reasonable nor

permissible, particularly in light of repeated Warnings by

Congress that the OCC has exceeded its authority in

recent years. Notwithstanding the OCC’s contrary sugges-

tion, the Riegle-Neal Interstate Banking and Branching

Efficiency Act of 1994 (“Riegle-Neal”), Pub. L. No. 103-328,

108 Stat. 2338 (1994), and the Gramm-Leach-Bliley

Financial Modernization Act (“GLBA”), Pub. L. No. 106-

102, 113 Stat. 1338 (1999), do not support respondents’

argument in this case. In fact, those Acts’ legislative

5

histories reflect Congressional disapproval of overreaching

by the OCC.

+

ARGUMENT

I. THE OCC HAS NO AUTHORITY TO INTER-

FERE SO SUBSTANTIALLY WITH THE STATES’

ABILITY TO PROTECT THEIR CITIZENS.

The combined effect of the OCC’s rules is to severely

curtail the states’ ability to protect their citizens in their

dealings with hundreds of state-chartered companies,

despite a strong state interest in ensuring fairness in the

marketplace. If upheld, the rules would render numerous

substantive state laws inapplicable to operating subsidiar-

ies and prevent state officials in many cases from enforc-

ing even those laws that do apply. It is thus unsurprising

that Congress did not explicitly delegate to the OCC

authority to promulgate these rules. This Court should not

find that Congress implicitly did what it did not do explic-

itly, because powers with such sweeping ramifications for

consumers and state sovereignty are not delegated by

mere implication. See FDA v. Brown & Williamson Tobacco

Corp., 529 U.S. 120, 133, 159-60 (2000) (“[Wje must be

guided to a degree by common sense as to the manner in

which Congress is likely to delegate a policy decision of

such economic and political magnitude to an administra-

tive agency.”).’

* Although this brief does not discuss the Tenth Amendment

implications of the OCC’s rules, amici curiae note that this Court has

granted certiorari on the question of whether the rules violate the

Tenth Amendment by effectively converting a state-chartered corpora-

tion into a federal instrumentality in violation of the laws of the state of

(Continued on following page)

6

A. The States Have a Strong Interest in Pro-

tecting Their Citizens in Their Dealings

with State-Chartered Operating Subsidi-

aries.

States have a longstanding, well-recognized interest

in protecting their consumers and are often in the best

position to respond quickly and appropriately to abusive

practices in the marketplace. In comparison to the federal

government, states are more familiar, accessible, and

accountable to their constituencies and are better posi-

tioned to act as laboratories of experimentation in resolv-

ing problems in areas as fundamental as home lending.*

The extension of the rights of national banks to state-

chartered non-banks would impair the states’ ability to

pursue this important state interest as to a significant

number of state corporations with substantial consumer

contact. The OCC has identified approximately 500 na-

tional bank operating subsidiaries that deal directly with

its creation. That the OCC’s interpretation may raise serious constitu-

tional questions is reason alone to deny deference to the OCC. See Solid

Waste Agency of N. Cook County v. U.S. Army Corps of Eng’rs, 531 U.S.

159, 172-74 (2001); Edward J. DeBartolo Corp. v. Fla. Gulf Coast Bldg.

& Constr. Trades Council, 485 U.S. 568, 575-78 (1988); AFL-CIO v. Fed.

Election Comm'n, 333 F.3d 168, 175, 179 (D.C. Cir. 2003).

* See Gregory v. Ashcroft, 501 U.S. 452, 458 (1991) (stating that

federalism “assures a decentralized government that will be more

sensitive to the diverse needs of a heterogenous society” and “allows for

more innovation and experimentation in government”); Baher Azmy,

Squaring the Predatory Lending Circle: A Case for States as Laborato-

ries of Experimentation, 57 Fla. L. Rev. 295, 390-400 (2005); Christo-

pher L. Peterson, Federalism and Predatory Lending: Unmasking the

Deregulatory Agenda, 78 Temple L. Rev. 1, 61-68 (2005).

7

consumers.’ Wells Fargo Bank alone has nearly 160 such

operating subsidiaries, with a substantial majority appar-

ently involved in mortgage lending. See supra note 5. Just

one subsidiary of National City Bank of Indiana, First

Franklin Financial, originated over $29 billion mortgages

in 2005, composing 4.4% of the subprime (higher-cost)

market share that year. 1 Inside Mortgage Finance, The

2006 Mortgage Market Statistical Annual 187 (2006).

Like national banks, operating subsidiaries are

permitted to engage in a wide range of activities beyond

mortgage lending — such as acting as a finder for used car

sales.’ Many of these activities lie well outside the OCC’s

expertise, rendering the states’ role in regulating these

non-bank entities all the more critical.

B. Upholding Section 7.4006 Would Immunize

State-Chartered Operating Subsidiaries

from Important Substantive Consumer Pro-

tection Laws.

The interplay of Section 7.4006 with other OCC rules

threatens to displace vitally important state consumer

* See OCC, National Bank Operating Subsidiaries Doing Business

with Consumers (Dec. 31, 2005), http//www.occ.treas.gov/consumer/

Report%20%202006%20for%20Bank%20pdf. pdf.

* See OCC, Activities Permissible for a National Bank 2005, at

3, 10-12 (Feb. 2006), http://www.occ.treas.gov/corpapps/BankAct.pdf

(listing permissible activities for national banks and their operating

subsidiaries, including “Medicare and Medicaid counseling” and finder

activities); OCC Corporate Decision 97-60, 1997 WL 402653, *2 (July 1,

1997) (approving an application to expand an operating subsidiary’s

activities to include acting as a “finder” for used car sales and taking a

fee for referring customers to “national auto service companies, such as

Firestone, Jiffy Lube and other appropriate parties”); Patricia A.

McCoy, Banking Law Manual § 5.02 (2d ed. 2003).

8

protection laws as to entities that are themselves crea-

tures of the states. This preemption sweeps more broadly

than the specific supervisory laws at issue in this case, as

the OCC has arrogated to itself the right to preempt state

consumer protection laws that merely place a “condition”

or have more than an incidental effect on any national

bank powers recognized by the OCC. See 69 Fed. Reg.

1904, 1911-12, 1916-17 (2004); infra Section II. While this

case frames the respective rights of state and federal

officials to oversee these state-chartered entities, it also

implicates the rights of aggrieved consumers to petition

the courts directly for relief.

A critical example of rights and remedies at stake are

those arising under laws enacted by a number of states to

curb abusive mortgage lending practices. In response to

abuses in the high-cost mortgage market, Congress

enacted the Home Ownership and Equity Protection Act

of 1994 (“HOEPA”), Pub. L. No. 103-325, Title I, Subt. B,

108 Stat. 2160 (1994) (codified primarily at 15 U.S.C.

§ 1639). The legislative history of HOEPA makes it clear

that the “Conferees intend|ed] to allow states to enact

more protective provisions than those in [HOEPA].” H.R.

Rep. No. 103-652 (1994) (Conf. Rep.), reprinted in 1994

U.S.C.C.A.N. 1977, 1992; see also 15 U.S.C. § 1610(b).

States and localities are much more likely than the federal

government to appreciate the impact of abusive lending

practices that are linked to increased mortgage foreclo-

sures, because foreclosures may lead to neighborhood

" See, e.g., Azmy, supra note 4, at 343-45; Roberto G. Quercia et al.,

The Impact of Predatory Loan Terms on Subprime Foreclosures: The

Special Case of Prepayment Penalties and Balloon Payments (2005),

http://www.kenan-flagler.unc.edu/assets/documents/foreclosurepaper. pdf;

The Reinvestment Fund, Mortgage Foreclosure Filings in Pennsylvania

(Continued on following page)

9

decline, lowered property values, higher rates of aban-

donment, higher rates of violent crime, and other costs.”

Although HOEPA accomplished many of its objectives,

market abuses exploited its weaknesses. To bolster the

federal law, states including North Carolina, Georgia, New

York, Illinois, and Massachusetts enacted “state HOEPAs”

providing greater protections with private rights of action.”

At the request of two national banks and their operat-

ing subsidiaries, the OCC pronounced the Georgia law

preempted in its entirety with respect to national banks

and their operating subsidiaries, and on the same day

announced its proposed expansive new preemption rules.”

The OCC has cited its preemption of the Georgia law as an

75-84 (2005), http://www.trfund.com/resource/downloads/policypubs/

Mortgage-Forclosure-Filings. pdf.

* Dan Immergluck & Geoff Smith, The External Costs of Foreclo-

sure: The Impact of Single-Family Mortgage Foreclosures on Property

Values, 17 Housing Policy Debate 57 (2006); William Apgar et al., The

Municipal Cost of Foreclosures: A Chicago Case Study 8-12 (2005),

http://www. hpfonline.org/PDF/Apgar-Duda_Study_Ful]_Version.pdf.

* See, e.g., N.C. Gen. Stat. §§ 24-1.1A, -1.1E, -2.5, -8, -9, -10.2; Ga.

Code Ann. §§ 7-6GA-1 to -13; N.Y. Banking Law §6-l; N.Y. Gen. Bus.

§ 771-a; N.Y. Real Prop. Acts. § 1302; 815 Ill. Comp. Stat. 137/1 to

137/175; Mass. Gen. Laws ch. 183C §§ 1-19.

” 68 Fed. Reg. 46,264 (Aug. 5, 2003); 68 Fed. Reg. 46,119 (Aug. 5,

2003). For thoughtful academic criticisms of the OCC’s preemption of state

anti-predatory lending laws and other consumer protection laws, see

generally Azmy, supra note 4, at 382-83, 385-88; Nicholas Bagley, The

Unwarranted Regulatory Preemption of Predatory Lending Laws, 79 N.Y.U.

L. Rev. 2274 (2004); Peterson, supra note 4; Arthur E. Wilmarth, Jr., The

OCC’s Preemption Rules Exceed the Agency's Authority and Present a

Serious Threat to the Dual Banking System and Consumer Protection, 23

Ann. Rev. of Banking & Fin. Law 225 (2004); Vincent Di Lorenzo, Federal-

ism, Consumer Protection and Preemption: A Case for Heightened Judicial

Review (St. John’s Legal Studies Research Paper #09-0026 2005),

http//ssrn.com/abstract=796 147.

10

example of how it will apply the 2004 preemption rule

standards, see 69 Fed. Reg. 1904, 1911-12 nn.57, 59 (2004),

suggesting that it will take the position that other “state

HOEPAs” are preempted as well.” Preemption of these

laws_is unfair and unwise, as empirical studies have

demonstrated that they are effective in reducing predatory

lending without reducing consumers’ access to legitimate

credit.” In the predatory lending arena, as in a host of

other contexts, Section 7.4006’s extension of preemption to

state-chartered operating subsidiaries strips borrowers of

important rights and remedies under state law that were

expressly designed to cure inadequacies in federal law.”

" An OCC official testified to Congress that, despite a Congres-

sional request for delay, the OCC proceeded with the final preemption

rules due to continuing initiatives from states on anti-predatory

lending laws. Cong. Review of OCC Preemption: Hearing Before the

Subcomm. on Oversight & Investigations of the House Fin. Servs.

Comm., 108th Cong. 30-31 (Jan. 28, 2004) (testimony of Julie Wil-

liams, OCC First Senior Deputy Comptroller and Chief Counsel),

available at http://commdocs.house.gov/committees/bank/hba937 17.000/

hba93717_Of. htm; cf Bagley, supra note 10, at 2284 (noting that rules

would preempt all state predatory lending laws).

™ See Roberto G. Quercia et al., Assessing the Impact of North

Carolina's Predatory Lending Law, 15 Housing Policy Debate 573

(2003); Wei Li & Keith S. Ernst, Center for Responsible Lending, The

Best Value in the Subprime Market: State Predatory Lending Reforms

(2006), http://www.responsiblelending.org/pdfs/rr010-State_Effects-0206.

pdf; cf. Peterson, supra note 4, at 74-76 (discussing spillover effects of

preemption rules).

* Operating subsidiaries assert that state laws limiting prepay-

ment penalties are preempted pursuant to Section 7.4006. See, eg.,

Nat'l City Bank of Ind. v. Turnbaugh, 2006 WL 2294843, at *1 (4th Cir.

Aug. 10, 2006). The states’ interest in curbing abuses regarding

prepayment penalties is significant, because prepayment penalties have

been linked to an increase in the risk of foreclosure in subprime loans.

See, e.g., Quercia et al., The Impact of Predatory Loan Terms on

Subprime Foreclosures, supra note 7; cf. H.R. Rep. No. 103-652,

(Continued on following page)

11

C. Upholding Section 7.4006 Would Prevent

State Officials from Enforcing Even Many

Non-Preempted State Laws, Despite the

Agency’s Own Weak Enforcement Record

and Self-Interest.

In addition to preempting substantive state law,

Section 7.4006 forecloses any meaningful role for states in

~ overseeing national bank operating subsidiaries. The rule

would prevent state officials ~ including attorneys general —

from bringing their resources, experience, and expertise to

bear to investigate and enforce a broad swath of consumer

law as to these state-chartered entities. See supra note 2.

It is difficult to overstate the significance of this result, as

state officials have been the leaders in enforcing consumer

protection laws. According to one 2004 congressional report,

state banking agencies and state attorney generals’ offices

employ nearly 700 full time examiners and attorneys to

monitor compliance with consumer laws, more than seven-

teen times the number of OCC personnel allocated to

investigate consumer complaints. Comm. on Fin. Servs.,

108th Cong., Views and Estimates on Matters to Be Set

Forth in the Concurrent Res. on the Budget for Fiscal Year

2005, at 16 (Comm. Print 2004), available at http://financial

services. house.gov/media/pdf/F Y 2005%20Views_Final.pdf, cited

in Wilmarth, supra note 10, at 316 & n.359. “In the area of

abusive mortgage lending practices alone, State bank

supervisory agencies initiated 20,332 investigations in

2003 in response to consumer complaints, which resulted

in 4,035 enforcement actions.” Jd.

reprinted in 1994 U.S.C.C.A.N. at 1991-92 (indicating that the HOEPA

conferees intended that more restrictive state laws relating to prepay-

ment penalties would remain in effect following HOEPA's enactment).

12

By contrast, the OCC’s record of consumer protecticn

enforcement is extremely weak. The agency lists only eight

actions in a section on its website captioned “[a]ctions the

OCC has taken against banks engaged in abusive practices.”

OCC, Consumer Protection News: Unfair and Deceptive

Practices, http://www.occ.treas.gov/Consumer/Unfair.htm (last

visited Aug. 28, 2006). The OCC stayed its hand for more

than a quarter century before bringing its first action in

2000 to address unfair and deceptive practices under

Section 5 of the Federal Trade Commission Act. Even

then, the action came only after a decade in which the

target bank “had been well known in the .. . industry as

the poster child of abusive consumer practices” and after

“(a] California state prosecutor ... embarrassed the OCC

into taking action.””

Rather than vigilantly and publicly enforcing con-

sumer protection laws, the OCC has in recent years

frequently intervened on the side of national banks or

their operating subsidiaries against the consumer. See

“ See Julie L. Williams & Michael S. Bylsma, On the Same Page:

Federal Banking Agency Enforcement of the FTC Act to Address Unfair

and Deceptive Practices by Banks, 58 Bus. Law. 1243, 1244, 1246 &

n.25, 1253 (2003) (noting that the OCC brought its first such action in

2000, citing authority from the early 1970s indicating that the OCC had

the authority to bring such an action under Section 8 of the Federal

Deposit Insurance Act, and conceding that “[a]n obvious question is why

it took the federal banking agencies more than twenty-five years to

reach consensus on their authority to enforce the FTC Act”); see also

Peterson, supra note 4, at 72-73; Wilmarth, supra note 10, at 352-56.

"© Duncan A. MacDonald (former General Counsel, Citigroup Inc.’s

Europe «1d North American card business), Letter to the Editor,

Comptroller Has Duty to Clean Up Card Pricing Mess, Am. Banker,

Nov. 21, 2003, at 17; see also Frontline: Secret History of the Credit Card

(PBS television broadcast Nov. 23, 2004) (transcript available at

http://www. pbs.org/wgbh/pages/frontline/shows/credit/etc/script.html).

13

Jess Bravin & Paul Beckett, Friendly Watchdog: Federal

Regulator Often Helps Banks Fighting Consumers, Wall

St. J., Jan. 28, 2002, at Al. For example, it has filed

amicus briefs on behalf of operating subsidiaries in cases

ranging from the State of Minnesota’s suit to enforce the

Telemarketing Sales Rule, 16 C.F.R. §§ 310.1-.7, to lower

state court challenges to state unauthorized practice of

law rules that affect document preparation charges.”

That the OCC sides with banks rather than consum-

ers when their interests conflict is not wholly surprising

given its institutional interests. Depository institutions

may choose not only between state and federal regulators,

but also among federal regulators, leading to “charter

competition” in banking.” The OCC has a financial stake

in attracting financial institutions to its charter because

it is funded by assessments from the banks it regulates,

rather than by Congressional appropriations. OCC, Annual

Report, Fiscal Year 2005, at 7, available at http://www.

occ.treas.gov/annrpt/2005AnnualReport.pdf. In 2005, 97%

of the OCC’s operations were funded by revenues from

assessments. Jd.

* See, ¢.g., Minnesota ex rel. Hatch v. Fleet Mortgage Corp., 181

F. Supp. 2d 995, 997, 999-1001 (D. Minn. 2001) (denying a motion to

dismiss and noting that “[t]he OCC’s insistence that it must have

exclusive jurisdiction over subsidiaries in order to avoid having its

authority ‘restricted’ is not persuasive”); Charter One Mortgage Co. v.

Condra, 847 N.E.2d 207 (Ind. Ct. App. 2006) (rejecting argument of

operating subsidiary and OCC amicus that the challenged state law

was preempted).

” See, e.g., Christine EF. Blair & Rose M. Kushmeider, Challenges to

the Dual Banking System: The Funding of Bank Supervision, 18 FDIC

Banking Review 1, 14 (2006); John A. Weinberg, Competition Among

Bank Regulators, 88 Fed. Res. Bank of Richmond/Econ. Q. 19, 19

(2002).

14

The OCC has not been shy about using preemption to

encourage institutions to adopt its charter. A former

comptroller, John D. Hawke, Jr., described the OCC’s use

of its power to override state laws protecting consumers as

“one of the advantages of a national charter,” and asserted

that he was “not the least bit ashamed to promote it.”

Bravin & Beckett, supra, at Al. This charter competition

and funding mechanism create conditions ripe for regula-

tory capture. Cf. Bagley, supra note 10, at 2295 (describing

“two well-documented institutional pathologies: regulatory

capture .. . [and] self-aggrandizing administrators,” which

“could manifest themselves in particularly pernicious ways

if agencies were given an effective carte blanche to over-

ride the laws of duly elected state legislatures”) (footnotes

omitted). Judicial deference is unwarranted in this cir-

cumstance, where a self-interested agency has interpreted

the scope of its own exclusive jurisdiction in an area of

tremendous consequence for the public. See ACLU v. FCC,

823 F.2d 1554, 1567 n.32 (D.C. Cir. 1987) (per curiam)

(“[I]t seems highly unlikely that a responsible Congress

would implicitly delegate to an agency the power to define

the scope of its own power.”); Hi-Craft Clothing Co. v.

NLRB, 660 F.2d 910, 916 (3rd Cir. 1981) (noting that “an

agency ruling that broadens its own jurisdiction is exam-

ined carefully” because “government agencies have a

tendency to swell, not shrink”).

II. NO DEFERENCE IS DUE BECAUSE THE

PREEMPTION DETERMINATION INVOLVES

PURE ISSUES OF LAW.

Chevron deference is also inappropriate because the

preemption issue before the Court involves pure issues of

law as to which the agency has no special expertise.

15

Practical agency expertise is one of the primary justifica-

tions for Chevron deference. See Pension Benefit Guar.

Corp. v. LTV Corp., 496 U.S. 633, 651-52 (1990). With

respect to the interpretation of preemption cases, however,

banking regulators have no greater expertise than the

courts. As the Tenth Circuit explained in Colorado Public

Utilities Commission v. Harmon, 951 F.2d 1571 (10th Cir.

1991):

{C]ourts should defer to the judgment of an ad-

ministrative agency with reference to topics

within the agency area of expertise. . .. However,

a preemption determination involves matters of

law — an area more within the expertise of the

courts than within the expertise of the [adminis-

trative agency].

951 F.2d at 1579 (internal quotation marks and citations

omitted); see also Nat'l Mining Ass’n v. Sec’y of Labor, 153

F.3d 1264, 1267 (11th Cir. 1998) (citing Harmon, 951 F.2d

at 1579) (citation omitted).

The OCC itself acknowledged the purely legal nature

of Section 7.4006 by stating, in promulgating the rule, that

it “reflects the conclusion we believe a Federal court would

reach, even in the absence of the regulation, pursuant to

the Supremacy Clause and applicable Federal judicial

precedent.” 66 Fed. Reg. 34,784, 34,790 (July 2, 2001). The

agency also devoted substantial portions of the 2004

preemption and visitation rules’ commentaries to analyz-

ing this Court’s prior decisions, a quintessential judicial

function. See 69 Fed. Reg. 1904; 1910-11 (Jan. 13, 2004);

69 Fed. Reg. 1895, 1899 (Jan. 13, 2004); 68 Fed. Reg.

46,119, 46,121-23 (Aug. 5, 2003); 68 Fed. Reg. 6363, 6368-

69 (Feb. 7, 2003).

16

In promulgating the preemption rules, the agency not

only addressed issues of pure law, but resolved those

issues incorrectly. One example is the agency’s handling of

this Court’s preemption jurisprudence. In Barnett Bank of

Marion County, N.A. v. Nelson, 517 U.S. 25 (1996), the

Court held:

In defining the pre-emptive scope of statutes and

regulations granting a power to national banks,

[several of the Court’s prior] cases take the view

that normally Congress would not want States to

forbid, or to impair significantly, the exercise of a

power that Congress explicitly granted. To say

this is not to deprive States of the power to regu-

late national banks, where (unlike here) doing so

does not prevent or significantly interfere with

the national bank’s exercise of its powers.

Id. at 33 (1996) (emphasis added). This has been the law

since the 1860’s. See Nat'l Bank v. Commonwealth, 76 U.S.

353, 362 (1869) (“It is only when the State law incapaci-

tates the banks from discharging their duties to the

government that it becomes unconstitutional.”) (emphasis

added). Ignoring these authorities, while purporting to

“distill({]” them, the OCC promulgated the 2004 preemp-

tion rules, which preempt not only state laws that “inca-

pacitate” or “prevent” or “significantly interfere,” but also

state laws that merely “condition” the exercise of national

bank powers. 69 Fed. Reg. at 1910 & n.53, 1916-17 (em-

phasis added) (citing Barnett, 517 U.S. at 34, although the

case provides no support for the proposition that state

laws that only “condition” the exercise of national bank

powers are preempted).

As described in Section III below, the OCC’s rules

are based on other legal errors, including its erroneous

17

assumptions that operating subsidiaries are the equiva-

lent of departments or divisions of their parent banks and

that the OCC’s authority to preempt state authority over

operating subsidiaries follows necessarily from the na-

tional banks’ authority to own them. The Court owes no

deference to rules that are premised on analysis of these

purely legal issues, which are best resolved by the courts.

Ill. THE COURT SHOULD NOT DEFER TO THE

OCC’S CLAIM OF EXCLUSIVE VISITORIAL

POWERS OVER OPERATING SUBSIDIARIES

BECAUSE THE STATUTORY LANGUAGE IS

CLEAR.

When Congress’s intent is clear, no deference is due

because the Court must give effect to congressional intent.

Chevron, 467 U.S. at 842-43. Whether there is an ambigu-

ity is determined by looking at the overall context. FDA v.

Brown & Williamson Tobacco Corp., 529 U.S. 120, 132-33

(2000).

The judiciary is the final authority on issues of

statutory construction and must reject adminis-

trative constructions which are contrary to clear

congressional intent. If a court, employing tradi-

tional tools of statutory construction, ascertains

that Congress had an intention on the precise

question at issue, that intention is the law and

must be given effect.

Chevron, 467 U.S. at 843 n.9 (citations omitted). Even

when ambiguity is found, it “must be such as to make it

appear that Congress either explicitly or implicitly dele-

gated authority to cure that ambiguity,” and a failure to

negate that authority does not supply it. Am. Bar Ass'n v.

FTC, 430 F.3d 457, 468-69 (D.C. Cir. 2005).

18

In the clearest terms possible, 12 U.S.C. § 484 ex-

empts national banks from state visitorial powers. Seeking

to extend this exemption to state-chartered operating

subsidiaries, the OCC asserts that operating subsidiaries

are “the equivalent of departments or divisions of their

parent banks.” 66 Fed. Reg. 34,784, 34,788 (July 2, 2001)

(discussing proposed new Section 7.4006). This erroneous

claim is contradicted by long-settled law, as well as state-

ments by the OCC itself. Even if this claim were true, it

would not provide a basis for extending the exemption to

non-bank operating subsidiaries, because the plain lan-

guage of the statute provides the exemption only to “na-

tional banks.” This conclusion is supported by this Court’s

decision in Board of Governors of the Federal Reserve

System v. Dimension Financial Corp., 474 U.S. 361 (1986),

which rejected a similar claim by the Federal Reserve.

Because the language of Section 484 is unambiguous, no

deference is due to the OCC’s assertion of exclusive visito-

rial powers over operating subsidiaries.

A. Well-Established Common Law Principles

Negate the OCC’s Claim that Operating

Subsidiaries Are the Equivalent of De-

partments or Divisions of Their Parents.

The OCC’s claim that subsidiaries are the equivalent

of departments or divisions of their parent banks contra-

dicts basic principles long-settled in the common law. It is

fundamental that parent corporations, like all sharehold-

ers, are distinct from the corporations they own. See

United States v. Bestfoods, 524 U.S. 51, 61-62 (1998). This

is true even where the parent and the subsidiary have the

same officers and directors, have the- same name, and are

“extremely interrelated.” See, eg., 1 William Meade

19

Fletcher et al., Fletcher Cyclopedia of the Law of Private

Corporations § 25 (perm. ed., rev. vol. 2005). “The corpora-

tion is an entity, distinct from its stockholders even if the

subsidiary’s stock is wholly owned by one person or corpora-

tion.” Buechner v. Farbenfabriken Bayer Aktiengesellschaft,

154 A.2d 684, 686-87 (Del. 1959). This Court has described

“this respect for corporate distinctions” as a “bedrock

principle” of the common law. Bestfoods, 524 U.S. at 62.

Because they are distinct entities, a parent company is not

liable for the debts of its subsidiaries. This is “a general

principle of corporate law deeply ‘ingrained in our eco-

nomic and legal systems.’” Jd. at 61 (quoting William O.

Douglas & Carrol M. Shanks, Insulation from Liability

Through Subsidiary Corporation, 39 Yale L.J. 193 (1929)).

The OCC invokes the concept of equivalence to permit

banks and their subsidiaries to have the best of both

worlds: preemption and limited liability. Yet, ironically,

characterizing operating subsidiaries as a department or

division may, in the right circumstances, help deprive

them of the latter. See, e.g., Yoder v. Honeywell, Inc., 104

F.3d 1215, 1220-21 (10th Cir. 1997).

This Court has noted that “the failure of [a federal

statute] to speak to a matter as fundamental as the

liability implications of corporate ownership demands

application of the rule that ‘[iJn order to abrogate a com-

mon-law principle, the statute must speak directly to the

question addressed by the common law.” Bestfoods, 524

U.S. at 63 (quoting United States v. Texas, 507 U.S. 529,

534 (1993)). Section 484 vests the OCC with exclusive

visitorial authority over “national bank|[s],” which cannot

be read to encompass banks’ non-bank operating subsidi-

aries.

20

While the judiciary is the arbiter of the unambiguous

meaning of “national bank,” Chevron, 467 U.S. at 843 n.9,

it is telling that even the OCC has at times acknowledged

the distinction between operating subsidiaries and their

parent banks. In interpretive letters permitting shared

state oversight of insurance activities in 1983 and 1988,

the OCC stated:

Unlike a national bank, ... an operating sub-

sidiary is a creature of state corporate laws. It is

not in the strict sense a federal instrumentality.

Therefore, the Comptroller’s Office does not

derogate Section 484 by according other au-

thorities the right to examine a national bank’s

subsidiary if the Office determines that such

examinations would be helpful in regulating the

activities of the subsidiary.

The OCC’s current operating subsidiary preemption rule

deserves no deference because its premise contradicts the

well-established common law difference between a parent

bank and a subsidiary, a distinction recognized in some of

the OCC’s own letters.

* OCC Interp. Ltr. 277, 1983 WL 54162 (Dec. 21, 1983), quoted in

OCC Interp. Ltr., 1988 WL 282227 (June 7, 1988) (concluding that “a

national bank, absent a compulsory court order, may legally refuse to

comply with requests by state officials to inspect the books and records

of a national bank’s division, but may not refuse such a request for

records of an operating subsidiary”) (emphasis added), cf; OCC Interp.

Ltr., 1990 WL 362185 n.3 (Oct. 26, 1990) (opining that Ohio laws

requiring licensing, examination, and visitation by state authorities for

national banks to engage in securities activities are preempted, but

expressly taking no position “regarding the authority of the state to

enforce any state laws against an operating subsidiary of a national

bank”).

21

B. Even If Operating Subsidiaries Were

Equivalent to National Banks, Board of

Governors v. Dimension Financial Precludes

the OCC’s Extension of Section 484 to Oper-

ating Subsidiaries.

The Court’s decision in Board of Governors of the

Federal Reserve System v. Dimension Financial Corp., 474

U.S. 361 (1986), addressed a situation closely analogous to

the OCC’s purported application of Section 484 to operat-

ing subsidiaries. There, the Federal Reserve Board argued

that its authority over “banks” pursuant to the Bank

Holding Company Act included the authority to make

banking regulations applicable to bank equivalents. While

the Court agreed that “there is much to be said for regulat-

ing financial institutions that are the functional equiva-

lent of banks,” it held that the agency had “no power to

correct flaws that it perceives in the statute it is empow-

ered to administer.” 474 U.S. at 374.

In Dimension Financial, the agency did not directly

revise the Act’s definition of “bank,” but rather interpreted

expansively two phrases contained in the statutory defini-

tion. See id. at 364, 368-69; 49 Fed. Reg. 794, 796-97 (Jan.

5, 1984). The agency argued that in the years subsequent

to the enactment of the relevant statutory provisions, the

powers of previously unregulated lending institutions had

substantially expanded, “making them for all intents and

purposes banks” under the statute. 474 U.S. at 367 n.3

(internal quotation marks omitted). According to the agency,

the recent proliferation of these institutions threatened the

structure established by Congress and necessitated the

new regulation. Jd. at 367. The Court rejected the argu-

ment, holding that the statute’s plain language controlled.

Id. at 374. Here, as in Dimension Financial, extending

22

coverage to bank equivalents would be a job for Congress,

not the agency.

The OCC’s reliance on the “incidental powers” provi-

sion in 12 U.S.C. § 24 (Seventh) does not change this

result. The court below erred in holding that the general

authority of the OCC could be used to broaden the specific

grant of exclusive visitorial powers under Section 484. The

court concluded that, “‘[tlo the extent that using an

operating subsidiary is a legitimate power granted to

national banks, [Section 484] provides the OCC with

ample authority to preempt states from exercising visito-

rial powers over the subsidiary.’” Watters, 431 F.3d at 561

(quoting Wachovia Bank v. Burke, 414 F.3d 305, 316 (2d

Cir. 2005), petition for cert. filed, 74 U.S.L.W. 3233 (U.S.

Sep. 30, 2005) (No. 05-431)). This reasoning should be

rejected. When the exercise of a particular agency power is

governed by a specific statutory provision, it is that provi-

sion, not the agency’s general authority, that controls. See

Dimension Fin., 474 U.S. at 372 n.6 (holding that a provi-

sion authorizing the Board to issue regulations to adminis-

ter and carry out the Act’s purposes did not permit the

Board to expand its jurisdiction beyond the boundaries of

the specific provisions at issue); First Nat'l Bank in St.

Louis v. Missouri, 263 U.S. 640, 659 (1924) (“it is wholly

illogical to say that a power which by fair construction of

the statutes is found to be denied, nevertheless exists as

an incidental power”); cf. Whitman v. Am. Trucking Ass’ns,

531 U.S. 457, 468 (2001) (noting that Congress “does not

... hide elephants in mouseholes”).

23

IV. DEFERENCE IS INAPPROPRIATE BECAUSE

THE OCC’S READING CANNOT BE SQUARED

WITH CONGRESSIONAL DISAPPROVAL OF

RECENT OCC OVERREACHING.

Even if the Court were to find that the relevant

language of the NBA is ambiguous, deference would be

inappropriate under step two of the Chevron test, which

examines whether the agency’s interpretation is a reason-

able and permissible construction of the statute. See

Chevron, 467 U.S. at 843-44. The OCC’s position is neither

reasonable nor permissible due to all of the flaws de-

scribed in Sections I through III above. It also cannot be

squared with legislative history showing Congressional

concern in recent years about OCC overreaching, particu-

larly with respect to preemption and the agency’s interpre-

tation of the NBA's “incidental powers” provision.

Although the OCC has relied on Riegle-Neal and

GLBA to support its claim of authority, the legislative

histories of the two acts and the 1997 amendments to

Riegle-Neal demonstrate how unreasonable the agency’s

current position is. In Riegle-Neal, Congress explicitly

stated that, in the interstate branch context, the “host

state’s” consumer protection, fair lending, and community

reinvestment laws apply to any branch in the host state of

an out-of-state national bank to the same extent as such

laws apply to a branch of a bank chartered by that state,

except “when Federal law preempts the application of such

State laws to a national bank.” Pub. L. No. 103-328, § 102,

108 Stat. 2338, 2350 (1994) (codified at 12 U.S.C.

§ 36(f)(1)(A)). The conference report makes it clear that

Riegle-Neal was not intended to undermine the states’ role

in ensuring consumer protection:

24

States have a strong interest in the activities and

operations of depository institutions doing busi-

ness within their jurisdictions, regardless of the

type of charter an institution holds. In particular,

States have a legitimate interest in protecting

the rights of their consumers, businesses, and

communities. Federal banking agencies .. . play

an important role in maintaining the balance of

Federal and State law under the dual banking

system. Congress does not intend that [Riegle-

Neal] alter this bal.nce and thereby weaken

States’ authority to protect the interests of their

consumers, businesses, or communities.

H.R. Rep. No. 103-651, at 53 (1994) (Conf. Rep.), reprinted

in 1994 U.S.C.C.A.N. 2068, 2074 (emphasis added).

The Riegle-Neal conferees also left no ambiguity about

the preemption principles that they intended to incorpo-

rate — that is, the narrow, traditional preemption princi-

ples articulated by this Court that the OCC failed to follow

in promulgating its preemption rules, as explained in

Section II above. The conference report states:

Under well-established judicial principles, na-

tional banks are subject to State law in many

significant respects. ... Generally, State lew ap-

plies to national banks unless the State law is in

direct conflict with the Federal law, Federal law

is so comprehensive as to evidenee Congressional

intent to occupy a given field, or the State law

stands as an obstacle to the accomplishment of

the full purposes and objectives of the Federal

law. In this regard, the impact of a State law on

the safe and sound operations of a national bank

is one factor that may be taken into account in

considering whether Federal law preempts State

law. Courts generally use a rule of construction

25

that avoids finding a conflict between the Federal

and State law where possible. The title does not.

change these judicially established principles.

Id. (emphasis added).”

The conferees also explicitly criticized the OCC for

being “inappropriately aggressive” in applying “traditional

preemption principles,” with the result that state law was

being preempted in certain “situations where the federal

interest did not warrant that result.” Jd. (citing examples).

In light of this concern, Congress imposed exceptional

procedural requirements on federal banking agencies,

requiring them to publish for comment any new opinion

letter or interpretive rule preempting state consumer

protection and fair lending laws. 12 U.S.C. §43. The

conference report indicates that these requirements were

“not intended to confer upon the agency any new authority

to preempt.... Rather, [they were] intended ... to help

ensure that an agency only makes a preemption determi-

nation when the legal basis is compelling and the Federal

policy interest is clear.” H.R. Rep. No. 103-651, at 55 (Conf.

Rep.), reprinted in 1994 U.S.C.C.A.N. at 2076.

In amendments to Riegle-Neal in 1997, Congress

added a requirement that the OCC include in its annual

report to Congress a review of, and explanation for, each of

its preemption determinations. Riegle-Nea] Amendments,

” Indeed, Congress gave specific instruction to the OCC as to how

and when it could expand the boundaries of the existing standards for

displacing state law in a separate exception to the general, default rule

that host state consumer protection and fair lending laws apply: when

the OCC determines that the law would have a discriminatory effect on

national bank branches when compared to branches chartered by the

host state. 12 U.S.C. § 36(f 1XAXii).

26

Pub. L. No. 105-24, § 2, 111 Stat. 238, 239 (1997). Again, a

driving force was concern that the OCC had “undertaken

preemptive actions which were unnecessarily expansive.”

143 Cong. Rec. S5638 (daily ed. June 12, 1997) (statement

of Sen. Sarbanes); see also 143 Cong. Rec. $5637 (daily ed.

June 12, 1997) (statement of Sen. D’Amato). Riegle-Neal

and its 1997 amendments thus reflected Congressional

dissatisfaction with the OCC’s overreaching as of the

1990’s and certainly cannot be read as an endorsement of

the far more expansive preemption agenda that the OCC

revealed through its 2001 and 2004 rules.

There is also no merit to the OCC’s argument that

Congress, in GLBA, sanctioned the agency's extension of

preemption and exclusive jurisdiction by referring to

national bank operating subsidiaries as entities that

“engage([] solely in activities that national banks are

permitted to engage in directly and are conducted subject

to the same terms and conditions that govern the conduct

of such activities by national banks.”” This provision was

not intended as a license for the OCC to preempt state law

as to operating subsidiaries. Rather, the statutory lan-

guage was intended to curb the OCC, which had author-

ized operating subsidiaries to engage in activities that

Congress had not chosen to permit parent banks to engage

in directly. As Representative Bliley explained:

[O]ne of the most important aspects of the

Gramm-Leach-Bliley Act is that it reaffirms a

long-standing principle of the Federal Banking

law — that a national bank may not own any

* Pub. L. No. 106-102, § 121, 113 Stat. 1338, 1378 (1999) (codified

at 12 U.S.C. § 24a(gX3)(A)); see also Azmy, supra note 4, at 387 (noting

that the OCC has attempted to transform a limited grant of authority

into complete exempt on for operating subsidiaries).

27

interest in or control another company engaged in ac-

tivities that national banks cannot conduct directly

unless such ownership or control is expressly author-

ized by Federal law. ... Recently, the Comptroller of

the Currency has interpreted section 24 (Seventh) of

the [NBA] to permit national banks to own and con-

trol subsidiaries engaged in activities that national

banks cannot conduct directly. These decisions and

the legal reasoning therein are erroneous and con-

trary to the law. The Act overturns these decisions

and renders inoperative those portions of Part 5 of

the Comptroller’s regulations that purport by admin-

istrative action to authorize national banks to control

subsidiaries engaged in activities that the national

banks cannot conduct directly.

145 Cong. Rec. E2386-01, 1999 WL 1032747 (Nov. 4, 1999)

(statement of Rep. Bliley).

The legislative histories of the Acts show that Con-

gress believed that the OCC had already overstepped its

bounds even prior to the agency’s expanded displacement

of states’ supervisory and substantive laws in 2001 and

2004, making any claim that the Acts sanctioned these

recent expansions unsustainable.”

®

* Bipartisan concerns about OCC overreaching were also voiced at

Congressional hearings on the 2004 rules. See, e.g., Cong. Review of OCC

Preemption: Hearing Before the Subcomm. on Oversight & Investigations of

the House Fin. Servs. Comm., 108th Cong., at 3 (Jan. 28, 2004) (statement

of Chairwoman Sue Kelly), available at http//commdocs.house.gov/

committees/bank/hba93717.000/nba93717_0f.htm (“[Flor a regulator to

single-handedly preempt a State’s ability to both determine and enforce

laws without public debate or explicit direction from Congress is not only

troublesome, but I believe it is careless.”); Wilmarth, supra note 10, at

297 & n.279.

28

CONCLUSION

For the foregoing reasons, the decision of the court of

appeals should be reversed.

Respectfully submitted,

KATHLEEN KEEST AMANDA QUESTER

ELLEN HARNICK Counsel of Record

CENTER FOR RESPONSIBLE CENTER FOR RESPONSIBLE

LENDING LENDING

302 West Main Street 910 17th Street, NW, Suite 500

Durham, NC 27701 Washington, DC 20006

(919) 313-8548 (202) 349-1872

September 1, 2006