According to a new ruling by the U.S. Supreme Court in the case of Watters v. Wachovia, the mortgage lending subsidiaries of federally chartered banks are exempt from state oversight.

Here is the Court's synopsis of the opinion:

Wachovia Bank sued Watters, the Commissioner of the Michigan Office of Insurance and Financial Services, for a declaratory judgment stating that the National Bank Act and its regulations preempt the state of Michigan from regulating national banks. Wachovia also sought an injunction to prevent Michigan from stopping Wachovia's mortgage lending activities. Wachovia Bank is a national banking association. Wachovia Mortgage registered under Michigan law to make mortgage loans, and later became a wholly owned subsidiary of Wachovia Bank. On April 3, 2003, Wachovia Mortgage advised the State of Michigan that it was surrendering its lending registration in Michigan. The Commissioner responded by advising Wachovia Mortgage that it would no longer be authorized to conduct mortgage lending activities within the state. Wachovia sought a declaration that the Michigan statutes at issue are preempted by the National Banking Act.

Under 12 U.S.C. § 484(a), national banks are not subject to state "visitorial powers," which are inspection and regulatory powers, except when allowed by federal law. The Office of the Comptroller of the Currency (OCC), the federal administrative agency in charge of regulating banking, issued 12 C.F.R. § 7.4000, which prevents states from using visitorial powers on national banks. The OCC also promulgated the rule that the laws apply equally to national banks and their subsidiaries in 12 C.F.R. § 7.4006. Michigan argued that a subsidiary of a national bank with a state rather than a national charter should not fall under the definition of a national bank, and that preventing a state from regulating a state entity violates the Tenth Amendment.

The district court granted Wachovia's motion for summary judgment, and the United States Court of Appeals for the Sixth Circuit affirmed. The Sixth Circuit applied the analysis used in the United States Supreme Court case Chevron U.S.A., Inc. v. Natural Resources Defense Council. Under Chevron, the courts must defer to administrative agencies unless the actions of the agencies are contrary to the statute enabling their power or are unreasonable interpretations of the statute. The court found that, although the statute was silent on the issue, the OCC's interpretation was reasonable in light of the OCC's power to both exclusively regulate banks and also regulate powers incidental to banking. Also, the Tenth Amendment did not apply because the National Bank Act was a valid use of Congress's Commerce Clause power, and the Tenth Amendment only protects unenumerated powers.

The NAR fears that banks want to get into real estate and that the Supreme Court will rule that in sales and rentals banks won't have to follow state laws either. That could have devastating effects on licensed brokers and agents.

Mary Trupo, NAR's public issues director, explains, "What this means is the ruling allows the OCC to preempt state regulatory powers, so for us, it could be something similar that happened with state insurance rules. The national banks used the OCC preemption rules to enter into the insurance brokerage business. Our concern is that this could open the door to do the same with real estate.

"Brokers and agents would be competing against an entity that isn't subject to state regulations," she continues. "And it still blurs the line between banking and commerce. This ruling is not addressing banks into real estate directly, but we see this as another building block in banks trying to enter into real estate brokerage. The effect on consumers is that competition could be limited and consumers don't normally benefit when competition is limited. If banks build a subsidiary, your local Realtor is competing with a big banking conglomerate, and consumers will have less choice."

Pat V. Combs, 2007 president of the National Association of Realtors® released the following statement, expressing disappointment with the opinion issued today by the U.S. Supreme Court in the case of Watters v. Wachovia:

"Any persons or organizations that are concerned with state statutes and regulations, and the ability of the federal government to preempt these state regulations, should find today's opinion disconcerting."

"The Watters v. Wachovia decision validates the Office of the Comptroller of the Currency's preemption of state banking laws with regards to bank operating subsidiaries. NAR continues to believe that Congress did not authorize the OCC to exempt these mortgage lenders and other state-chartered corporations, wholly owned by national banks, from complying with certain state laws."

"The Court's ruling to the contrary gives a tremendous competitive advantage to federally chartered banks over financial and non-financial competitors, increasing the value of the federal charter at the expense of state licensing, marketplace competition and potentially even consumer protection measures. The problems consumers face in the subprime mortgage market illustrate why it is important to retain and strengthen, rather than weaken, state consumer protection laws."

"With national banks now operating in the insurance and securities industries, and continuing their push to enter into real estate transactions, I am concerned about the implications of this ruling for our industry. This could mean that, should banks ever be permitted to broker real estate, which Justice Stevens' dissent identifies as a possibility, the OCC may likewise claim a similar exemption from state real estate regulations for operating subsidiaries engaged in brokerage."