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The Ninth Circuit just handed down an important decision on federal preemption.  In Wells Fargo Bank, N.A. v. Boutris, No. 03-16194 (9th Cir., Aug. 12, 2005),  it found preemption under the National Bank Act ("NBA") but not under the Depository Institutions Deregulation and Monetary Control Act ("DIDMCA"). 

Facts

This case arose from an attempt by the California Commissioner of Corporations to audit the residential mortgage operations of Wells Fargo Home Mortgage, Inc., a wholly-owned operating subsidiary of Wells Fargo Bank, N.A., a national bank.  WFHMI held several state licenses, one under California’s Residential Mortgage Lender Act (Cal. Fin. Code § 50000 et seq.) ("RML") and another under California’s Finance Lenders Law (Cal. Fin. Code § 22000 et seq.) ("CFL").  The purpose of the audit was to determine WFHMI’s compliance with California’s "per diem interest" statutes, Cal. Fin. Code § 50204(o) and Cal. Civ. Code § 2948.5(a), both of which fall under the enforcement authority of the California Corporations Commissioner.  The Commissioner demanded that WFHMI undertake massive refunds of interest to consumers, allegedly collected by WFHMI in violation of California’s "per diem interest" statutes.  WFHMI declined, and took the position that it was subject to the exclusive regulatory authority of the OCC. 

Five days later, WFHMI and its national bank parent sued for declaratory relief in federal court.  They alleged that the NBA preempted the Commissioner’s exercise of investigative and licensing authority over WFHMI, the "operating subsidiary."  They also contended that Section 501 of DIDMCA preempted California’s "per diem" statute.  The district court agreed as to both questions.  (Wells Fargo Bank, N.A. v. Boutris, 265 F. Supp. 2d 1162 (E.D. Cal. 2003).)

Holding

On appeal, the Ninth Circuit agreed with the district court on the first issue (NBA preemption) but disagreed on the second (DIDMCA preemption).  It affirmed in part and reversed in part.

As for NBA preemption, the Commissioner’s investigation of WFHMI and its audit activities were preempted.  The Boutris court gave "deference" to the OCC’s 2001 "operating subsidiary" regulation, which states:   "Unless otherwise provided by Federal law or OCCD 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 so holding, the Ninth Circuit sided with the Second Circuit’s recent preemption decision to the same effect in Wachovia Bank, N.A. v. Burke, No. 04-3770-CV (2d Cir., July 11, 2005).  The Boutris court held: 

Allowing national banks to conduct business through operating subsidiaries is therefore a permissible construction [by the OCC] of those banks’ incidental powers under the Bank Act.  We hold that the OCC’s interpretation of 12 U.S.C. § 24 (Seventh) as authorizing it to allow national banks to conduct business through operating subsidiaries is a permissible one.
(Slip op., at p. 10471.)

Consequently, the court concluded:  "We hold that the Commissioner is preempted from ordering regulatory audits of national bank operating subsidiaries such as WFHMI …, and that the injunction issued by the district court is valid insofar as it precludes the Commissioner from doing so."  (Slip op., at p. 10478.)

As for state licensing, the Ninth Circuit held that this too is preempted by the NBA, but for a different reason:  "California’s attempt to license operating subsidiaries is field-preempted by the OCC’s own licensing regulations."  (Slip op., at p. 10480.)  Consequently, WFHMI did not need a license under the California Residential Mortgage Lender Act (Cal. Fin. Code § 50000 et seq.) or under the California Finance Lenders Law (Cal. Fin. Code § 22000 et seq.).

The Ninth Circuit reached a different conclusion as to DIDMCA.  It followed the First Circuit’s reasoning in Grunbeck v. Dime Savings Bank of New York, FSB, 74 F.3d 331 (1st Cir. 1996), and decided that California’s law, like the New Hampshire "simple interest" statute at issue in Grunbeck, simply regulates the time at which interest can be charged, not the rate.  Furthermore, by its peculiar terms, DIDMCA preempts only those laws that impose "express" limits on rates and amounts of interest.  Wells Fargo countered that California’s "per diem" statute does expressly limit rate—it limits interest to zero percent during the period prior to recordation of the deed of trust.  The Ninth Circuit termed that a "clever" argument, but ultimately unavailing.  It concluded that "California’s per diem interest statute … is not preempted by section 501(a)(1) of the DIDMCA."  (Slip op., at p. 10488.)

What Boutris Means

The twin holdings of Boutris carry several implications. 

First, the fact that California’s "per diem" statute was preempted only under the NBA and not under the DIDMCA creates yet another schism between federal and state-chartered institutions.  National banks and their operating subsidiaries (and, presumably, also federal savings associations) will be immune from state licensing and regulatory audit activities, but state-chartered institutions will not be.  Some institutions may decide to maintain their state CFL licenses anyway, because California expressly limits the category of persons to whom a CFL license may sell a mortgage loan to other CFL licensees.  There is an exception for institutions organized under federal law, but it is unclear whether that immunizes a seller/broker. 

Second, the Ninth Circuit’s holding as to NBA preemption gives broad "Chevron deference" to the OCC’s "operating subsidiary" regulation, section 7.4006.  This augurs favorably for other preemption arguments arising under the OCC’s 2004 preemption regulations.  National banks urging broad "Chevron deference" to the OCC’s 2004 regulations can now cite Boutris as approving a broad approach to deference.

Third, the Boutris court’s holding as to a state regulator’s investigative activities could add extra octane to the industry’s resistance to the investigative subpoenas issued by New York Attorney General Eliot Spitzer concerning allegations of racial discrimination by mortgage lenders.