Amicus Curiae Brief — Watters v. Wachovia Bank, NA

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No. 05 - 1342

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In the

Supreme Court of the United States

October Term, 2006

LINDA A. WATTERS, COMMISSIONER, MICHIGAN OFFICE OF

INSURANCE AND FINANCIAL SERVICES,

Petitioner,

Vv.

WACHOVIA BANK, N.A. ef al,

Respondent.

On Writs of Certiorar: to the United States

Court of Appeals for the Sixth Circuit

BRIEF OF AMICUS CURLT NEW ENGLAND LEGAL

FOUNDATION IN SUPPORT OF RESPONDENTS ON THE MERITS

MICHAEL E. MALAMU1

Counsel of Record for Amicus Curie

Martin |. Newhouse

New England Legal Foundation

150 Lincoln St.

Boston, MA 02111

Tel.: (617) 695-3660 x 204

bax: (617) 695-3656

michaelmalamute¢ nelfonline.org

LL TE LEE LOL SLE LEST LTT CL OE ETT TS A

QUESTIONS PRESENTED

Amicus Curie New England Legal Foundation

(“NELF”) adopts the Questions Presented as stated by

Respondents Wachovia Bank, N.A. et al.:

Pr @e

National banks’ “incidental powers” under the

National Bank Act [defined at 12 U.S.C. § 38] include

the power to conduct banking activities through

operating subsidiaries that are licensed, regulated

and supervised by the Office of the Comptroller of

the Currency (“OCC”). National bank activities

conducted through an operating subsidiary are

subject to the “same terms and conditions” that

: apply to the conduct of such activities by the

national bank. 12 U.S.C. § 24a; 12 C.F.R. § 5.34(e)(3).

National banks’ federally-authorized mortgage

lending activities are regulated and supervised

exclusively by the OCC. The questions presented

are:

1. Whether national bank mortgage lending

activities are subject to exclusive OCC regulation

and supervision when conducted through an

operating subsidiary, just as they are when

conducted directly by the parent bank.

2. Whether the OCC’s exclusive regulation and

supervision of national bank mortgage lending

activities conducted through operating subsidiaries

is permissible under the Tenth Amendment.

In this Brief, Amicus Curie New England Legal

Foundation (“NELF”) principally addresses the first question

as stated by Respondents.

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TABLE OF CONTENTS

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I is elite lstniieetticiipeaiitisiiiaiiiaiineitineniipaisisiaieiasnile

I. Preemption of state regulation of national

bank subsidiaries is reasonable and sound

public policy because the inherent

inefficiency of duplicative regulation

outweighs any potential benefit .....................0c00000 4

II. Only federal regulators, such as the OCC,

can properly determine whether parallel

state regulation of federally regulated

national bank subsidiaries is warranted ................. 13

I i nicl 16

?

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ee eee eae ere Ps ee Peale al Pad

TABLE OF AUTHORITIES

Cases

Bele ©. Rena, Z1B F.36 G6 C6 Ce, FOP ccnscsrccsescnsisvsssscssvevsessinnsen 6

Chevron, USA, Inc. v. Natural Resources Defense

Crcetnel, GF TEE. Gar Ge ccnscnsidnciciemninveiteseniitienitiinibaae 6

Lettman v. Reno, 207 F.3d 1368 (11th Cir. 2000) .......0.........eee 6

M’‘Culloch v. Maryland, 17 U.S. (4 Wheat.) 316 (1819) ...... 13,14

Smiley v. Citibank (S.D.), N.A., 517 U.S. 735 (1996) .....cccceseeee 15

Wachovia Bank, NA. v. Burke, 319 F. Supp. 275 (D. Conn.

2004), aff'd, 414 F.3d 305 (2d Cir. 2005) ......cccccecserseeeeees 5

Wachovia Bank, N.A. v. Watters, 334 F. Supp. 2d 957 (W.D.

Mich. 2004), aff'd, 431 F.3d 556 (6th Cir. 2005) ............ 5

Wachovia Bank, N.A. v. Watters, 431 F.3d 556 (6th Cir. 2005) ..5

Constitution, Statutes, and Regulations -

OID. Cteet, AGO, VE cccerccssarecssnctetatsarssnenscsinsuaasinpnninaticiaiiiiin 8,13

National Banking Act (“NBA”), defined at 12 U.S.C. § 38 ...4,5

12 U.S.C. § 24a (g) (3) eessesssse0n ian nae litt 5

BZ UD. 6 GBS GD ccccccncccsstcsecnistnitttcssiiinammmssnsinbititaintieibiiiniingadeni 5

Pub. L. 106-102, Gramm-Leach-Bliley Act (“GLBA”) ......... 5,9

Pub. L. 104-290, National Securities Markets Improvement

Aide CE DGBG ccccrasessscccsnsocsctaiiiniessminnsiicanseiaieemimmiamanais 7

12 C.F.R. § 7.4006 (“Section 7.4006”) ........ccccccccceeeeeeenenees 3,4,5,6

66 Fed. Reg. 34,784 (July 2, 2001) ......c.sccccceseesnereeseees 5,6,9,10,13

61 Fed. Reg. 66,561 (Dec. 18, 1996) ....-...cecceeeesereerereeneenennnnes 10

Vv

Miscellaneous

145 Cong. Rec. H12,047 BR, I BOGIES ccscsncennnsmovemencesenscansoen 7

Debate in North Carolina Ratifying Convention,

July 29-30, 1788 (Statement of Mr. Davie),

included in 4 Philip B. Kurland & Ralph Lerner,

eds., The Founders’ Constitution, Article 6,

Cemnmm Z, FU. BS, GO GBE CIGD ceecscaccesccsesccsssssscsccessesess 8

Small Business Administration, Office of Advocacy,

Financing Patterns of Small Firms: Findings from the

1998 Survey of Small Business Finance (Sept. 2003),

available at http://www.sba.gov/ADVO/stats/

EE FEED cestttecensemcernensninmntecsmmnanmnmnnemnin 11

United States Environmental Protection Agency, Office of

Air Quality Planning & Standards, Innovative

Strategies and Economics Group, Economic

Analysis Resource Document (April 1999), available

at http://www.epa.gov/ttn/ecas/econdata/

URIS ccscssmsnansernemmenemmennntinenmensnmenne 11

United States Office of Management & Budget,

Circular A-4 (Sept. 17, 2003) (Regulatory Analysis),

included in National Academies Press, Valuing Health

for Regulatory Cost-Effectiveness Analysis (2006), at 258,

available at http://fermat.nap.edu/books/

030910077 1 /html/258.NEML ..........c.ccccccecssessecsesseeceeees 7,9

Gabe de Bondt, Retail Bank Interest-Rate Pass-Through: New

Evidence at the Euro Area Level, European Central

Bank Working Paper Series No. 136 (April 2002),

available at http://www.ecb.int/pub/pdf/scpwps/

W. Mark Crain, Small Business Administration, Office of

Advocacy, The Impact of Regulatory Costs on Small

Firms (Sept. 2005), available at http://www.sba.gov/

Aadvo/research/rs264tot. Pdf ..........cccccsccseseeeneesenseneneees 11

C. Boyden Gray, Regulation and Federalism,

B Waee J. FR, FO CURED ccrscesesscsscesnsensesevecnsonsees 7,8,9,10

Boris Hoffmann & Paul Mizen, Interest Rate Pass-through

and Monetary Transmission: Evidence from Individual

Financial Institutions’ Retail Rates,

Fe I Fa ee crtnstitieemensteceincineiemeen 11

Raymond J. Keating, Small Business & Entrepreneurship

Council, Small Business Survival Index 2006

(Oct. 2006), available at http://www.sbsc.org/Media/

ER I cctrrcctmicnenigputviowmnnciennssmniantemneens 12

James Madison, Federalist, No. 44 (Jan. 25, 1788) -................ 13

Charles Ou, Small Business Administration, Office of

Advocacy, Working Paper, Statistical Databases for

Economic Research on the Financing of Smail Firms in

the United States (2004), available at http://www.sba.

gov/advo/research/wkpO04Ou. pdf ..........ccesceceeeneeseeees 11

Richard J. Pierce, Jr., Regulation, Deregulation, Federalism, and

Administrative Law: Agency Power to Preempt State

Regulation, 46 U. Pitt. L. Rev. 607 (1985) ................. 8,15

Note, Preemption and Regulatory Efficiency in Federal Energy

Statutes, 103 Harv. L. Rev. 1306 (1990) ................... 7,10

Vii

viii

No. 05 - 1342

In the

Supreme Court of the United States

October Term, 2006 ?

LINDA A. WATTERS, COMMISSIONER, MICHIGAN OFFICE OF

INSURANCE AND FINANCIAL SERVICES,

Petitioner,

Vv.

WACHOVIA BANK, N.A. et al.,

Respondent.

On Writs of Certiorari to the United States

Court of Appeals for the Sixth Circuit

BRIEF OF AMICUS CURLE NEW ENGLAND LEGAL

FOUNDATION IN SUPPORT OF RESPONDENTS ON THE MERITS

ee OR

INTEREST OF AMICUS CURL

Amicus Curte New England Legal Foundation

(“ NELF”) seeks to bring to the Court's attention its views, and

the views of its supporters, concerning the authority of the

Office of the Comptroller of the Currency (“OCC”) to preempt

state regulation of national bank subsidiaries.'

1 Pursuant to Supreme Court Rule 37.6, counsel for Amicus states that

neither counsel for Petitioners nor Respondent authored this Brief in whole

or in part and no person or entity other than Amicus made a monetary

contribution to the preparation or submission of the brief. Pursuant to

Supreme Court Rule 37.3 (a), counsel for Amicus has submitted consent by

Respondents to the filing of this Brief and that Petitioner's consent to all

amicus briefs is on file with this Court.

Amicus Curia NELF is a non-profit, public interest law

firm, incorporated in Massachusetts in 1977. It is

headquartered in Boston. Its membership consists of

corporations, law firms, individuals, and others who believe in

NELF’s mission of promoting balanced economic growth for

the United States and the New England region, protecting the

free enterprise system, and defending economic rights. NELF’s

more than 130 members and supporters include a cross-section

of large and small corporations from all parts of New England

and the United States.

NELF’s members are affected by the business climate in

New England, which depends, in part, upon fairly balanced

and efficient business regulation with clearly determined

reporting responsibilities. Many of NELF’s members are banks

and many other NELF members are engaged in heavily

regulated industries, such as insurance, healthcare, and energy

production and distribution. Therefore, they are concerned

about the proper balance of state and federal regulations in

their industries. They are especially concerned about the

impact of unnecessary costs associated with inefficient,

uncoordinated, and duplicative regulations. Furthermore,

some of NELF’s members, particularly those in the small

business sector who often operate on the margins of

profitability. are concerned with duplicative regulation

because they utilize the services of regulated industries and

must therefore bear the passed-on costs of such regulation.

NELF has regularly appeared in state and federal

courts, as party or counsel, in cases raising issues of general

economic significance to the New England and national

business communities. See, ¢e.g., Rapanos v. United States, 126 S.

Ct. 2208 (2006); S.D. Warren Co. v. Maine Bd. of Envtl. Protection,

2

126 S. Ct. 1843 (2006); Kelo v. City of New condon, 545 U.S. 469

(2005); San Remo Hotel, L.P. v. City of San Francisco, 545 U.S. 323

(2005); Exxon Mobil Corp. v. Saudi Basic Indus. Corp., 125 S. Ct.

1517 (2005); Commissioner v. Banks, 125 S. Ct. 826 (2005); Green

Tree Fin. Corp. v. Bazzle, 539 U.S. 444 (2003); EEOC v. Waffle

House, Inc., 534 U.S. 279 (2002); Palazzolo v. Rhode Island, 533

U.S. 606 (2001); Crosby v. National Foreign Trade Council, 530

U.S. 363 (2000). NELF served as amicus curiz in Wachovia Bank,

N.A. v. Burke, 414 F.3d 305 (2d Cir. 2005), cert. pending, 05-431

(filed Sept. 30, 2005), which addressed similar ‘ssues to those

raised in this case.

A reversal by this Court of the decision of United States

Court of Appeals for the Sixth Circuit below would result in

duplicative state and federal regulation of national bank

subsidiaries, resulting in significant additional costs to the

banking sector, which could have an adverse effect on the

business climate of New England and the nation as a whole.

For these reasons, NELF’s members are concerned about the

issues presented in this case.

Amicus Curie therefore believes that this brief provides

an additional perspective which may aid the Court in

determining the issues raised in this case.

STATEMENT OF THE CASE

Amicus adopts the Statement of the Case contained in

the Brief of Respondents.

SUMMARY OF ARGUMENT

This Amicus Brief focuses on the sound public policy

reasons for enforcing the Office of the Comptroller of the

Currency (“OCC”) regulation preempting duplicative state

regulation of national bank subsidiaries. 12 C.F.R. § 7.4006

3

(“Section 7.4006”). Amicus argues that the regulation issued by

OCC preempt.ng state regulation of national bank subsidiaries

was properly issued, because it is a reasonable interpretation

of the relevant provisions of the National Banking Act, defined

at 12 U.S.C. § 38 (“NBA”). Moreover, parallel regulation by

state and federal governments .. nationatbanking subsidiaries

would result in unnecessary, inefficient, and costly duplicative

regulation. The costs of any such duplicative regulation would

inevitably be passed on to the banks’ customers, resulting in

higher interest rates and fees for borrowing. These additional

costs are likely to have a particularly harmful effect on small

businesses, many of which operate on the margins of

profitability, and rely on financing through the type of home

equity loans that are at issue in this case. Even relatively small

cost increases attributable to duplicative regulation can have a

serious adverse impact on a struggling small business.

In the American federal system, OCC, as the federal

regulator in charge of administering the NBA, must be allowed

to determine io what extent parallel state regulation is

consistent with the federal legislative scheme. The OCC has

reasonably determined that parallel state regulation of national

bank subsidiaries is unwarranted and should be preempted.

This economically efficient determination should be upheld.

ARGUMENT °

I. Preemption of state regulation of national bank

subsidiaries is reasonable and sound public policy

because ‘he inherent inefficiency of duplicative

rogulation outweighs any potential benefit.

This case involves the attempt by Petitioner, the

Commissioner of the Michigan Office of Insurance and

Financial Services (“Commissioner”), to regulate Respondent

4

Wachovia Mortgage Corp. (“Wachovia Mortgage”), a wholly

owned operating subsidiary of Respondent national bank

Wachovia Bank, N.A. (“Wachovia Bank”). (Collectively,

Wachovia Mortgage and Wachovia Bank are referred to herein

as “Wachovia.”) The OCC regulates national banks under the

National Banking Act, defined at 12 U.S.C. § 38 (“NBA”). 12

U.S.C. § 484 (a) of the NBA preempts state regulatory

oversight, called “visitation,” of national banks. On June 29,

2001, OCC issued 12 C.F.R. § 7.4006 (“Section 7.4006”), which

permits state regulation of national bank subsidiaries only to

the extent that states may regulate national banks themselves.

66 Fed. Reg. 34,784, 34,792 (July 2, 2001).? Section 7.4006 states:

“Unless 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.”

The District Court and Court of Appeals agreed with

Wachovia that Section 7.4006 preempts state regulation of

national bank subsidiaries, such as Wachovia Mortgage.

Wachovia Bank, N.A. v. Watters, 334 F. Supp. 2d 957 (W.D. Mich.

2004), aff'd, 431 F.3d 556 (6th Cir. 2005). In another recent case

involving similar state regulations in Connecticut, the courts

similariy upheld preemption under Section 7.4006. Wachovia

Bank, N.A. v. Burke, 319 F. Supp. 275 (D. Conn. 2004), aff'd, 414

F.3d 305 (2d Cir. 2005).

In her brief, the Commissioner futilely attempts to

2 The regulation was part of the OCC’s effort to conform its

regulations to the Gramm-Leach-Bliley Act, Pub. L. 106-102 (“GLBA”). 66

Fed. Reg. at 34,784, 37,788. Relevant provisions of GLBA include the

regulation uf national bank subsidiaries that “are conducted subject to the

same terms and conditions that govern the conduct of such activities by

national banks.” 12 U.S.C. § 24a (g) (3).

3

avoid analysis of Section 7.4006 under the long-standing test

for federal preemption prescribea by Chevron, USA, Inc. v.

Natural Resources Defense Council, 467 U.S. 837 (1984).

Commissioner's Brief at 28-38. Chevron, however, mandates

that courts, when interpreting a regulation to determine its

preemptive effect on state law, examine whether the

challenged regulation was “based on a_ permissible

construction of the [applicable] statute,” in this case, the NBA.

Chevron, 467 U.S. at 843. In that regard, courts should generally

uphold the construction by the applicable agency when it is

reasonable. See Bell v. Reno, 218 F.3d 86, 90 (2d Cir. 2000);

Lettman v. Reno, 207 F.3d 1368, 1371-72 (11th Cir. 2000).

Amicus contends that the reasonableness analysis under

Chevron implicates the very public policy concerns that Amicus

relies on in its argument. In this case, OCC thoughtfully

considered the appropriateness of state regulation of national

bank subsidiaries and reasonably determined that exclusive

federal regulation made sense in the circumstances. 66 Fed.

Reg. at 34,788-89 °

Amicus’s argument concentrates on the reasonableness

of OCC’s intent to preempt state regulation of federal banking

subsidiaries through Section 7.4006 and the sound public

policy grounds for upholding the regulation.’ Although there

3 The OCC rulemaking by which it adopted Section 7.4006 discussed

the comments on the proposed regulation (the majority of which supported

the regulation). 66 Fed. Reg. at 34,788-89. OCC determined that criticisms of

the proposed rule were ill-founded: “We disagree with those commentators

who believe that the new § 7.4006 wil! adversely affect the oversight of

operating subsidiaries either from a consumer protectior or a safety and

soundness perspective.” 66 Fed. Reg. at 34,789.

4 Amicus supports all the arguments made by Wachovia, but

addresses primarily the public policy rationale supporting Section 7.4006, in

6

may be many areas of administrative law in which the federal

government allows double regulation by both state and federal

‘administrators, such duplicate regulation is often unduly

complex, overly burdensome, and inherently prone to

conflicting mandates. See 145 Cong. Rec. H12,047 (Sept. 28,

1996) (Conf. Rep. on HR3005, National Securities Markets

Improvement Act of 1996, Pub. L. 104-290) (a “system of dual

federal and state ... regulation [may] result[} in a degree of

duplicative and unnecessary regulation. . . . [A] dual system of

regulation ..., in many instances, is redundant, costly and

ineffective.”); Note, Preemption and Regulatory Efficiency in

Federal Energy Statutes, 103 Harv. L. Rev. 1306, 1308 (1990)

(“[S]tate law that duplicates federal licensing should be

preempted per se. At best duplication wastes regulatory effort,

at worst, it subjects federal decisions to local review.” ); United

States Office of Management & Budget, Circular A-4 (Sept. 17,

2003) (Regulatory Analysis), contained in National Academies

Press, Valuing Health for Regulatory Cost-Effectiveness Analysis

(2006), at 258, 265, available at http://fermat.nap.edu/books/

0309100771/html/258.htm! (stating that “duplicative

regulations can also be costly. ... The local benefits of State

regulation may not justify the national costs of a fragmented

regulatory system.” ).

Even though local control sometimes has benefits under

certain circumstances, in many cases, such as the national

banking industry, the countervailing need for a strong central

government to facilitate interstate commerce warrants

exclusive federal regulation. See C. Boyden Gray, Regulation

regard to which Amicus believes it can be of greatest assistance to the Court

by raising the concerns of its members with regard to duplicative regulation.

7

and Federalism, 1 Yale J. on Reg. 93, 95-96 (1983).° Exclusive

federal regulation of national banking subsidiaries is especially

warranted because national banks are a significant part of the

national monetary system, “with respect to which the

appropriateness of a need for national-level [regulatory]

activity is obvious.” Gray, 1 Yale J. on Reg. at 110.°

National banks are a major contributor to interstate

commerce. The banking industry has undergone increasing

consolidation in recent years, creating an increasingly

nationwide industry. National bank subsidiaries are an integral

part of the business of national banks, performing similar

- Situations in which exclusive federal regulation is superior to local

regulation include:

(1) federal regulation [that] can prevent burdens on

interstate commerce, (2) some socially beneficial programs

[that] are easier to adopt as a political matter on a federal

level, (3) [situations when] states may. compete on the

stringency of regulation to the detriment of the nation,

and (4) [when] the federal government ... has greater

access to sources of the relatively scarce expertise essential

to some types of regulatory programs.

Richard J. Pierce, Jr., Regulation, Deregulation, Federalism, and Administrative

Law: Agency Power to Preempt State Regulation, 46 U. Pitt. L. Rev. 607, 646

(1985). As discussed below, all of these rationales, with the possible exception

of beneficial social programs, apply in the case of national banking

subsidiaries.

6 One of the purposes of the Constitution’s Article Six Supremacy

Clause was to allow the federal government to impose a national currency to

supersede the numerous conflicting state paper money standards that had

debased the value of money and stymied investment. See Debate in North

Carolina Ratifying Convention, July 29-30, 1788 (Statement of Mr. Davie),

included in 4 Philip B. Kurland & Ralph Lemer, eds., The Founders’

Constitution, Article 6, Clause 2, No. 19, at 601, 603 (1987).

8

operations to those that national banks could perform

themselves, especially since the passage of the Gramm-Leach-

Bliley Act, Pub. L. 106-102 (“GLBA”). See 66 Fed. Reg. at 34,788

(“Operating subsidiaries have often been described as the

equivalent of departments or divisions of their parent banks.”).

Banks service more and more mortgage customers through an

increasingly nationwide financial market with mortgage

interest rates determined by the national discount rate and

long-term federal bond rates. Subsidiaries of national banks

offer similar refinancing and equity line plans in numerous

states, which similarly affect homeowners throughout the

country. The alleged “predatory lending” schemes that

concern the Commissioner, Commissioner's Brief at 5, 24-25,

are problems that “spill across state lines” and are generally

best regulated at the federal level. See Office of Management &

Budget, Circular A-4 (Regulatory Analysis), at 264. Thus, as for

other industries of national scope, exclusive federal regulation

of national banks and their operating subsidiaries makes sense

because “[t]he wide differences in state laws, as well as the

frequent changes in those laws, make it practically impossible

for [such an industry] to determine the standards of conduct to

which they will be held.” Gray, 1 Yale J. on Reg. at 97.’

In addition, banking provides similar services

nationwide and requires considerable financial expertise to

7 “This uncertainty injures [national businesses} in a number of ways.

Because [national businesses] cannot predict the standards by which their

products will be judged, they may be reluctant to introduce . . . innovative

products. Shifting and conflicting legal standards also generate extensive and

expensive litigation, the costs of which are undoubtedly reflected in higher

insurance rates.” Gray, | Yale J. on Reg. at 97. The parallel in this case would

be higher interest rates in the secondary mortgage market primarily serviced

by Wachovia Mortgage and other similar national bank subsidiaries. |

9

regulate. Uniform federal regulation is warranted because of

the efficier.cy of a single center for regulatory expertise, instead

of fifty different state-based centers, many of which could not

be adequately funded or would be located in areas without

access to sophisticated academic or economic expertise. See

Gray, 1 Yale J. on Reg. at 109; Note, 103 Harv. L. Rev. at 1308

(federal regulation can “attract experts from a limited pool

[and] solidify uniform, nationwide policy.”).

Another, perhaps more pragmatic reason for exclusive

nationwide regulation of national banking subsidiaries is the

provision of fair treatment to different federal financial

institutions in order to create a level competitive playing field.

For example, since 1996, federal savings and loan association

(“thrift”) subsidiaries have received express preemption from

state regulation. 66 Fed. Reg. at 34,789 & n.19; 61 Fed. Reg.

66,561, 66,563 (Dec. 18, 1996). Parallel treatment of federal thrift

subsidiaries and national bank subsidiaries, exempting both

from state regulation, is clearly desirable. Otherwise thrifts

would receive unfair and unintended competitive advantages

through their exemption from costly duplicative state

regulation.

The Commissioner concedes that OCC has the right to

regulate national bank subsidiaries, such as Wachovia

Mortgage, so that if the Commissioner's position prevailed,

they would be subject to duplicative state and federal

regulation. Commissioner’s Brief at 35-36. The costs incurred

by such duplicative regulation inevitably will be passed on to

the consumers of the bank’s loan services, both directly

through higher interest rates and fees,* and indirectly because

8 See, ¢.g., Gabe de Bondt, Retail Bank Interest-Rate Pass-Through: New

Evidence at the Euro Area Level, European Central Bank Working Paper Series

10

the additional costs create a barrier to entry in the secondary

loan market, decreasing competition. For the costs of the

regulatory burden on small businesses, see W. Mark Crain,

Small Business Administration, Office of Advocacy, The Impact

of Regulatory Costs on Small Firms at 56 (Sept. 2005) (regulatory

expenses rest disproportionately on small businesses), available

at http://www.sba.gov/advo/research/rs264tot.pdf. These

higher rates could well have a devastating impact on the small

business sector, which is a major component of the economy in

both Amicus’s focus region of New England and nationwide.

The secondary mortgage market is a significant source of

capital for small businesses. Small Business Administration,

Office of Advocacy, Financing Patterns of Small Firms: Findings

from the 1998 Survey of Small Business Finance at 12 & n.6 (Sept.

2003), available at http://www.sba.gov/ADVO/stats/ssbf_98.pdf;

Charles Ou, Small Business Administration, Office of

Advocacy, Working Paper, Statistical Databases for Economic

Research on the Financing of Small Firms in the United States at 12

(2004), available at http://www.sba.gov/advo/research/

wkp04Ou.pdf. Many small businesses are sole proprietorships,

small partnerships, or closely held corporations, who may not

No. 136 (April 2002) (close to 100% long-term pass-through of changes in

market ~ interest rates to retail rates), available at

http://www.ecb.int/pub/pdf/scpw ps/ecbw p136.pdf; Boris Hoffmann & Paul

Mizen, Interest Rate Pass-through and Monetary Transmission: Evidence from

Individual Financial Institutions’ Retail Rates, 71 Economica 99 (2004) (high

rates of long-term pass-through); United States Environmental Protection

Agency, Office of Air Quality Planning & Standards, Innovative Strategies

and Economics Group, Economic Analysis Resource Document § 5.1.3.2 (April

1999) (“[|U|nder fairly general economic conditions, a regulation's impact on

producers is transitory. Ultimately, the costs are passed on to consumers in

the form of higher prices.”), available at http://www.epa.gov/ttn/ecas/

econdata/Rmanual2/0.0.htmI.

11

qualify for traditional business loans, or may not have the

sophistication to apply for them. Instead, they turn to built up

equity in their homes accessed through the secondary

mortgage market to fund start-up costs and ongoing capital

expenditures.

Small businesses, although a significant sector of the

business community and an engine of growth when taken as a

whole, often operate on the margins of profitability, and small

additional costs can make the difference between staying afloat

and dissolution. Small businesses in New England (Amicus’s

primary focus area), in particular, are vulnerable to regulatory

costs and difficulties in obtaining financing. See Raymond J.

Keating, Small Business & Entrepreneurship Council, Small

Business Survival Index 2006 at 2, 5, 10-11, 15-16 (Oct. 2006),

available at http://www.sbsc.org/Media/pdf/SBSI_2006.pdf

(ranking Connecticut 32d, Vermont 42d, Massachusetts 43d,

Maine 47th, and Rhode Island 48th, out of 50 states plus the

District of Columbia). The additional interest costs attributable

to coping with duplicative and possibly conflicting state and

federal regulations over national bank subsidiaries providing

home equity loans could make or break small businesses

nationwide, and especially in New England where they

already face higher than average burdens.

OCC therefore reasonably determined, consistent with

sound public policy, that uniform federal regulation of the

national bank subsidiaries outweighs any benefits of local

regulation. Exclusive federal regulation of national banking

subsidiaries is manifestly warranted because, among other

reasons, (1) they operate as an essential part of the national

monetary system, (2) they are heavily involved in interstate

commerce, (3) the expertise required to regulate them involves

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complex financial analysis best obtained in a centralized

federal setting, (4) duplicative regulation incurs passed-

through costs that harm consumers of secondary mortgages, in

particular small businesses, and (5) fairness warrants similar

federal regulatory treatment for federal thrift subsidiaries and

national bank subsidiaries.

Il. Only federal regulators, such as the OCC, can

properly determine whether parallel state regulation

of federally regulated national bank subsidiaries is

warranted.

The Supremacy Clause contained in Article Six of the

Constitution is an integral part of the system of checks and

balances inherent in the American federal system. For the

American federal system to work, the federal government

must be the ultimate decision maker as to the proper balance

between state and federal regulations. “The nation, on those

subjects on which it can act, must necessarily bind its

component parts.” M’Culloch v. Maryland, 17 U.S. (4 Wheat.)

316, 405 (1819).’ The first great case enforcing the Supremacy

Clause of Article Six of the Constitution was a banking case,

M ‘Culloch v. Maryland, which protected branches of the federal

bank (the nineteenth century equivalent in many ways of

national bank subsidiaries today)'® from state taxation.

National banking has thus been a subject for the federal

9 If the states were allowed supremacy over the federal government,

“the world would have seen ... the authority of the whole society every

~ where |sic] subordinate to the authority of the parts; it would have seen a

monster in which the head was under the direction of the members.” James

Madison, Federalist, No. 44 (Jan. 25, 1788).

10 National bank subsidiaries are analogous to departments or

divisions of their parent banks. 66 Fed. Reg. at 34,788.

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government from the foundation of the first Bank of the United

States at the beginning of the Republic. Id. at 401-02.

M’Culloch remains the bedrock of Supremacy Clause

jurisprudence and its wisdom is as pertinent today as it was

almost two hundred years ago. The Supreme Court held there

that “the states have no power, by taxation or otherwise, to

retard, impede, burden, or in any manner control, the

operations of the constitutional laws enacted by congress to

carry into execution the powers vested in the general

government.” M’Culloch, 17 U.S. at 435-36 (emphasis added).

While M ‘Culloch involved a state attempt to tax a branch of the

national bank, the Supreme Court's discussion of the coercive

power of state taxation of federal entities, particularly banks,

holds equally true for state regulation of those entities:

That the power of taxation is one of vital

importance, that it is retained by the states, that

it is not abridged by the grant of a similar

power to the Union, that it is to be concurrently

exercised by the two governments —are truths

which have never been denied.... [T]he ...

paramount [federal] character would seem to

restrain ..., a state from such other exercise of

this power, as is in its nature incompatible with,

and repugnant to, the constitutional laws of the

Union.

M'Culloch, 17 U.S. at 425. Therefore, just as “the power of

taxing [the national bank] by the states may be exercised so as

to destroy it,” M‘Culloch, 17 U.S. at 427, the power of regulating

the national banks and their subsidiaries by the states may be

exercised so as to destroy them.

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—_—

Federal regulatory agencies have several characteristics

“that make them well suited to the task of allocating regulatory

responsibility between themselves and state agencies [even]

when Congress has not explicitly allocated that responsibility

by statute.” Richard J. Pierce, Jr., Regulation, Deregulation,

Federalism, and Administrative Law: Agency Power to Preempt

State Regulation, 46 U. Pitt. L. Rev. 607, 664 (1985). This is

particularly true when an industry is national in scope, such as

banking, because state-by-state regulation can “create

substantial, disproportionate interstate spillovers.” Id. Indeed,

OCC’s interpretations of the NBA are entitled to great weight.

See Smiley v. Citibank (S.D.), N.A., 517 U.S. 735, 739 (1996). A

rationale federal system requires occasional federal preemption

of state attempts to regulate national industries and only the

federal government is able to make those decisions without

engendering chaos in the federal order. Federal regulators,

such as OCC, have the expertise to make decisions as to the

proper balance between state and federal regulation of national

bank subsidiaries. OCC thoroughly considered the issues and

determined that preemption of state regulation was warranted.

Its decision-was eminently reasonable. This Court should

enforce it.

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CONCLUSION

For the reasons stated above, this Court should affirm

the decisions of the Court of Appeals for the Sixth Circuit

below.

Respectfully submitted,

NEW ENGLAND LEGAL

FOUNDATION,

By its attorneys,

ne Malorne?

Michael E. Malamut

Counsel of Record

for Amicus Curix

Martin J. Newhouse

New England

Legal Foundation

150 Lincoln Street

Boston, MA 02111-2504

Telephone: (617) 695-3660 x 204

Facsimile: (617) 695-3656

Dated: November 3, 2006 michaelmalamut@nelfonline.org

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