State Farm Bank, F.S.B. v. Reardon

State Farm Bank

The Sixth Circuit recently issued a very significant decision in one of several related cases that our attorneys filed on behalf of State Farm Bank, a federal savings bank, and its exclusive agents (the "Agents"). At issue in the case, (State Farm Bank, F.S.B. v. Reardon, No. 07-4260, F.3d., 2008 WL 3876196; 6th Cir. Aug. 22, 2008), is whether state mortgage broker licensing requirements, as applied to the Agents (who are independent contractors but perform banking-related services exclusively for State Farm Bank) are preempted by the Home Owners' Loan Act ("HOLA") and the implementing regulations of the Office of Thrift Supervision ("OTS").

State Farm Bank, which does not maintain any branches or offices open to the public, uses the Agents, who have existing relationships with customers of State Farm's affiliated insurance companies, to perform marketing and customer services activities for the Bank. In an opinion letter issued in 2004, the OTS found that, because the application of the states' various licensing requirements to the Agents would obstruct State Farm Bank's efficient use of the Agents to conduct the Bank's marketing and customer service activities, those requirements were preempted, as so applied, by the OTS's regulations implementing the HOLA.

In an opinion issued on June 21, 2006 (State Farm Bank, F.S.B. v. Burke, 445 F. Supp. 2d 207; D. Conn. 2006), the US District Court for the District of Connecticut agreed, explaining that great deference was due to the OTS with respect to its interpretations of the HOLA and, in particular, of the OTS's own regulations.

The Sixth Circuit, in its Aug. 22nd decision involving Ohio's mortgage broker licensing requirements, came to the same conclusion but relied on the recently decided Supreme Court case Watters v. Wachovia Bank, N.A. rather than the OTS opinion. The Sixth Circuit observed that "Watters stands for the proposition that when considering whether a state law is preempted by federal banking law, the courts should focus on whether the state law is regulating 'the exercise of a [federally chartered] bank's power' not on whether the entity exercising that power is the bank itself." The Sixth Circuit concluded that because the Ohio licensing statute, as applied to the Agents, had the effect of regulating the exercise of State Farm Bank's federally granted banking powers, "the Ohio Act, as applied to State Farm Bank's exclusive agents, is preempted."

The Sixth Circuit's decision is particularly notable because no prior court decisions (other than the State Farm Bank v. Burke district court decision) have held that the OTS (or OCC) preemption regulations preempt state licensing requirements (as opposed to state requirements that regulate bank products) for entities other than a federally chartered bank (or savings association) or an operating subsidiary of such bank. Now, it appears that preemption of state licensing requirements may also be argued to exist with respect to agents of such a bank (or operating subsidiary thereof), to the extent that the licensing requirements directly and adversely affect the operations of the bank (or operating subsidiary).

Our financial services team was led by Howard Cayne, A. Patrick Doyle, and Nancy Perkins.

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