Watters v. Wachovia Bank, N.A.

PETITIONER:Linda A. Watters, Commissioner, Michigan Office of Insurance and Financial Services
RESPONDENT:Wachovia Bank, N.A., et al.
LOCATION:United States District Court for the District of Colorado

DOCKET NO.: 05-1342
DECIDED BY: Roberts Court (2006-2009)
LOWER COURT: United States Court of Appeals for the Sixth Circuit

CITATION: 550 US 1 (2007)
GRANTED: Jun 19, 2006
ARGUED: Nov 29, 2006
DECIDED: Apr 17, 2007

E. John Blanchard – on behalf of Petitioner
Robert A. Long, Jr. – argued the cause for Respondents
Sri Srinivasan – argued the cause for Respondents

Facts of the case

Under 12 U.S.C. Section 484(a), states do not have regulatory powers over national banks. In 2001 the federal Office of the Comptroller of Currency (OCC) issued federal regulation 12 C.F.R. 7.4006, which applied 12 U.S.C. Section 484(a) to state-chartered operating subsidiaries of national banks. Wachovia Mortgage was an operating subsidiary of the national bank Wachovia Bank, and was registered with the state of Michigan.

When Michigan attempted to exercise its regulatory powers over Wachovia Mortgage, Wachovia Bank sued Watters, a Michigan official, seeking a judgment that Michigan’s laws on operating subsidies of national banks were superceded by 12 U.S.C Section 484(a). Michigan argued that the OCC had exceeded the authority given it by Congress by extending the definition of “national bank” to cover state-registered operating subsidiaries. Michigan also argued that the extension of federal authority over state entities like Wachovia Mortgage violates the Tenth Amendment, which reserves to states all powers not delegated to the federal government.

The District Court rejected these arguments and ruled for Wachovia, and the U.S. Court of Appeals for the Sixth Circuit affirmed. The Circuit Court found that the decision of the OCC to apply rules for national banks to their operating subsidiaries was a reasonable interpretation of Congress’s intent, and therefore entitled to deference underChevron U.S.A. v. Natural Resources Defense Council. The Sixth Circuit also held that Congress had the power to regulate operating subsidiaries of national banks under the Commerce Clause, so the Tenth Amendment did not reserve that power to the states.


1) Is the decision of the Comptroller of Currency that federal authority over national banks extends to state-chartered operating subsidiaries of national banks entitled to judicial deference underChevron U.S.A. v. Natural Resources Defense Council?

2) Does 12 CFR 7.4006 violate the Tenth Amendment by treating a state-chartered operating subsidiary the same as a national bank for purposes of federal regulation?

Media for Watters v. Wachovia Bank, N.A.

Audio Transcription for Oral Argument – November 29, 2006 in Watters v. Wachovia Bank, N.A.

Audio Transcription for Opinion Announcement – April 17, 2007 in Watters v. Wachovia Bank, N.A.

John G. Roberts, Jr.:

Justice Ginsburg has the opinion this morning in case No. 05-1342, Watters versus Wachovia Bank.

Ruth Bader Ginsburg:

Business activities of national banks are controlled by the National Bank Act, the NBA and regulations adopted there under by the Office of the Comptroller of the Currency, OCC.

The NBA authorizes national banks to engage in real estate lending subject to OCC regulation under the Act only OCC not state regulators may oversee the bank’s conduct of its business and inspect the bank’s books and records.

The question in dispute does a national bank’s in mortgage lending remain outside the governance of state licensing and auditing agencies when the lending business is conducted not by the bank itself but by the bank’s operating subsidiary.

Operating subsidiary is a term used by OCC to describe “an entity authorized to do only business that the bank itself could do.”

In accord with the Court of Appeals that have considered this issue we hold that a national bank’s mortgage business whether conducted by the bank itself or through the bank’s operating subsidiary is subject to OCC’s superintendence and not to the licensing, reporting and visitorial regimes of the several States in which the subsidiary operate.

The case before us was initiated by Wachovia Bank an OCC chartered national bank and it’s wholly owned North Carolina chartered subsidiary, Wachovia Mortgage.

A company engaged in real estate lending in Michigan and elsewhere.

Under Michigan law banks, both national and state are exempt from state mortgage lending registration prescriptions but the exemption does not extend to the bank’s subsidiaries.

Michigan’s Office of Insurance and Financial Services notified Wachovia Mortgage that it could not engage in mortgage lending in the state unless it complied with Michigan’s registration requirements.

Wachovia Mortgage and its parent responded that their subsidiary is a subject exclusively to OCC’s licensing, ordering and surveillance regime.

To settle the dispute the Wachovia Company sued Michigan’s Commissioner Linda Watters for declaratory and injunctive relief prohibiting Watters from enforcing Michigan’s registration prescriptions against Wachovia Mortgage and from interfering with OCC’s exclusive visitorial authority.

The Federal District Court ruled for the Wachovia plaintiff, the Sixth Circuit affirmed and today we affirmed the Court of Appeals’ judgment.

Federally chartered banks are subject to state laws of general application in their daily business.

For example, state contract and property laws but when state prescriptions significantly impair the exercise of a national bank’s federally convert authority the State’s regulations must give way.

Michigan’s commission acknowledges that the state could not subject a national bank to visitorial controls but argues that this State’s regulatory regime is not displaced with respect to national bank’s operating subsidiaries, we disagree.

Since 1966, OCC has recognized that national banks have incidental authority under the NBA to do their business through operating subsidiaries.

Just as duplicative state inspection and supervision would significantly burden mortgage lending by a national bank so to those same state controls would interfere with that same activity when conducted by a national bank’s operating subsidiary.

This court has never held that the NBA’s preemptive reach extends only to the national bank itself rather in determining whether state law hampers the federally permitted activities of a national bank the court has focused on the national bank’s powers not on whether those powers are exercised by the national bank itself or an operating subsidiary.

In some way the national bank engages in real estate lending through an operating subsidiary.

The subsidiary is subject only to the same terms and conditions as those that would govern the bank itself.

The state law in this case, North Carolina law, governs matter pertaining to an operating subsidiaries incorporation State regulators cannot interfere with the business of banking by subjecting national banks or their OCC licensed operating subsidiaries to rival oversight regimes.

We reject Commissioner Watters’s alternative argument based on the Tenth Amendment to the constitution because regulation of national bank operations is Congress’s prerogative under the Commerce and Necessary and Proper Clauses.

The Tenth Amendment holds no sway in this case.

Justice Stevens has field a dissenting opinion in which the Chief Justice and Justice Scalia joined.

Justice Thomas took no part in the consideration or decision of this case.