Consumer Law & Policy Blog

Elizabeth Renuart on Line-Drawing and the Practical Effects of Watters v. Wachovia

by Elizabeth Renuart (National Consumer Law Center)

Rather than discussing why the majority may be legally wrong (the dissent does an excellent job of that), my thoughts focus on the lines drawn by the decision and its potential practical effects.

    One line that arguably became brighter is that between operating subsidiaries and other entities that are hired by or act as agents for national banks. The majority focuses on the legal relationship between operating subsidiaries and the banks, the OCC's position that it oversees both entities in a similar fashion, and the added "support" it found in the Gramm-Leach-Bliley Act for Congressional recognition of these closely related companies. The specificity with which the majority details its view of the legal support in federal statutes for its conclusion weighs against the authority of the OCC to extend preemption rights to agents or third party contractors who work closely with national banks, even if the OCC claims it can examine them. (The OCC put its foot in this pool a few years ago when it issued an opinion letter related to car dealers acting on behalf of banks in Michigan). Where an entity is not the equivalent of a national bank (see slip op. at 13), preemption ought not to extend to that business.

As for practical consequences, the decision should cause those remaining independent mortgage companies to reconsider whether they will seek federal charters to parent them in a bank holding structure. Any doubt about whether to go this route, at least as far as the regulatory playing field goes, is now eliminated. The OCC should be careful what it prays for: it is now crystal clear that it must examine and enforce all preempted state laws against all of the operating subsidiaries of national banks in all 50 states (and to know the ins and outs of those state laws). It has not hired scores of new examiners or enforcement attorneys. Its public record in enforcement has been weak over the last few years since it decided to take on this job.

Finally, the pressure now will build on the FDIC to create a similar playing field for state-chartered banks and their operating subsidiaries even though the legal infrastructure to do so is much weaker than the National Bank Act (arguably non-existent). Attempts to pressure the FDIC along these lines occurred 2 years ago but the FDIC shelved the industry's petition. I expect that pressure to resurface in light of this decision.

Ann Graham on the Surprises in Watters v. Wachovia

Professor Ann Graham, a banking law scholar, focuses on a few of the surprises in today's decision in the Watters v. Wachovia case:

1.  Justice Ginsburg authored the majority opinion, joined by Justices Kennedy, Souter, Breyer, and Alito.  In oral argument, Justice Ginsburg asked few questions of either party.  The Dissenting Opinion was written by Justice Stevens, joined by Chief Justice Roberts and Justice Scalia.  All these dissenting justices were active participants in the oral argument, displaying clear concern for the impact of this case on preemption jurisprudence.

2.  This is perhaps the biggest surprise:  The majority opinion did not examine Chevron deference at all.  According to the majority, the National Bank Act preempts the Michigan statute affecting state-chartered mortgage lending corporations which are structured as operating subsidiaries of national banks.  The majority opinion cannot point to any National Bank Act language for this preemption and does not examine Congressional intent.

3.  As Justice Stevens points out in the dissenting opinion, "the Court's eagerness to infuse congressional silence with preemptive force threatens the vitality of most state laws as applied to national banks -- a result at odds with the long and unbroken history of dual state and federal authority over national banks, not to mention our federal system of government.  It is especially troubling that the Court so blithely preempts Michigan laws designed to protect consumers.  Consumer protection is quintessentially a 'field which the States have traditionally occupied.' [citations omitted]"

4.  Here's the concluding statement of the dissent regarding the impact of this decision:  "Never before have we endorsed administrative action whose sole purpose was to preempt state law rather than to implement a statutory command."

(cross-posted from the Banking Law Prof Blog)

Supreme Court Decides Watters v. Wachovia

by Deepak Gupta

SCOTUSblog is reporting that the Supreme Court has ruled that federal law, not state law, controls the regulation of mortgage lending activity by national banks, even when that is carried on by an operating subsidiary of the bank. The vote was 5-3.  Ginsburg, joined by Kennedy, Souter, Breyer, and Alito, announced the opinion of the Court.  Stevens, joined by Roberts and Scalia, dissented.  Thomas took no part in the decision.  The opinions are available here.

Announcing the ruling in Watters v. Wachovia Bank (05-1342), Justice Ruth Bader Ginsburg said: "Where a 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" -- that is, federal regulation under the National Bank Act. ""Though state law, in this case North Carolina law, governs matters pertaining to an operating subsidiary's incorporation, state regulators cannot interfere with the 'business of banking' by subjecting national banks or their [federal]-licensed subsidiaries to rival oversight regimes."   

Much of the debate and briefing over this case concerned the interaction between preemption and the power of federal administrative agencies--a dicey and dangerous can of worms. Did Congress confer authority on the agency to preempt state law? Can Congress do that? Should the courts defer to the agency under these circumstances?    The Court avoided that can of worms today:

Watters disputes the authority of OCC to promulgate this regulation and contends that, because preemption is a legal question for determination by courts, [the regulation] should attract no deference. . . . This argument is beside the point, for under our interpretation of the statute, the level of deference owed to the regulation is an academic question. Section 7.4006 merely clarifies and confirms what the NBA already conveys: A national bank has the power to engage in real estate lending through an operating subsidiary, subject to the same terms and conditions that govern the national bank itself; that power cannot be significantly impaired or impeded by state law.

Consumer Groups File Amicus Brief in Important National Bank Act Preemption Case

     The National Consumer Law Center, the Consumer Federation of America, the Center for Responsible Lending, AARP, Consumers Union, the National Association of Consumer Advocates, Public Citizen, and other consumer groups have filed an amicus brief in an important preemption case pending before the U.S. Court of Appeals for the Second Circuit.  Pacific Capital Bank v. Connecticut, No. 06-4149cv, presents the question whether the states may regulate loan brokers who market tax refund anticipation loans (RALs) to low-income consumers, or, rather, as the district court held, such state regulation is preempted by the National Bank Act.  The brief, written principally by NCLC's Chi Chi Wu, explains that National Bank Act preemption does not apply to non-bank entities, such as loan brokers.

More on Important Supreme Court Preemption Case: Watters v. Wachovia Bank

By Brian Wolfman

     Today's Washington Post has this informative article on Watters v. Wachovia Bank, which presents the question whether the National Bank Act preempts states' efforts to regulate the lending activities of state-chartered subsidiaries of national banks.  The case will be argued in the Supreme Court on November 29.  We previously posted many of the Supreme Court briefs here.  On the day before the argument, the American Enterprise Institute is sponsoring a forum featuring speakers who take different views on this important preemption question.

Not So Cute Anymore

by Christopher Peterson

Gary Coleman endeared himself to Americans as a child actor staring in the 80's sitcom "Different Strokes". His cherubic face and affably excitable character reliably delivered punch lines, including especially his signature catchphrase "Whatchoo talkin' 'bout, Willis?"  When his television show ended, Coleman found that his parents and manager had mismanaged his multi-million dollar trust fund, eventually leaving him penniless.

I always felt sympathy for the actor, who suffers from a congenital kidney disease, as he tried to break out of his childhood typecasting and find a satisfying path in life. Still, it raised my eyebrows when I learned that Mr. Coleman had accepted a job as a spokesperson for Cash Call, Inc., a California based finance company that makes high-interest, unsecured loans to consumers in California, Idaho, Nevada, New Mexico, and Utah. In most other states Cash Call also acts as a solicitation agent for First Bank & Trust, Milbank, South Dakota.

This three-way relationship brought a couple of thoughts to mind:

First, lenders have a tendency to focus on economics when they talk about public policy. Discussions of usury law, disclosure law, and bankruptcy seem to inexorably turn to concepts like opportunity costs, Pareto optimal outcomes, and regulatory distortion. The intellectual contributions of behavioral economists are generally scorned or minimized. But lenders do seem to rely on psychology when they talk to their customers. Mr. Coleman is valuable to Cash Call and First Bank & Trust because of his notoriety. It is not as though loans from by a firm endorsed by Gary Coleman are better or cheaper loans. Rather they employ him because he is salient in the minds of millions of people who watched him on television back in the good-ole’ days. Mr. Coleman reminds us that things don’t always work out, and that even former TV super-stars do not need to feel bad about borrowing money from a shady company like Cash Call now and then. (Go to ripoffreport.com and search under "Cash Call" for a long list of upset customers, including this one or this one.) Mr. Coleman is an ideal spokesman for a company that wishes its customers to lower their guard. After all, who wouldn’t trust cuddly, little "Arnold" from TV?

A second point. In an essay forthcoming in the American Law Review, I question the wisdom of granting federal preemption to agents of chartered depository institutions. According to the Office of the Comptroller of the Currency and the Office of Thrift Supervision, independent agents of national banks and thrifts should be regarded as beyond the regulatory and legislative oversight of state governments. The FDIC is considering an attempt to grant similar powers to state banks, such as First Bank & Trust, Milbank, South Dakota. Federal regulators have explained that state governments should not be allowed to regulate national banks and thrifts simply because the financial institutions chose to deliver services through an agent. But as Cash Call’s relationship with First Bank & Trust demonstrates, non-depository agents will always tend to have less incentive to forego predatory behavior than a depository institution with closer oversight, greater capital requirements, and relatively greater investment in reputational capital. If First Bank & Trust wants to use Gary Coleman to peddle their high-interest loans, shouldn’t they be required to hire him directly, rather than hiding behind an agent?

In the end perhaps Mr. Coleman still deserves our empathy. I suspect he is being used yet again.

Supreme Court Asks for Solicitor General's Views in Important Preemption Case

    By Brian Wolfman

    In an order issued yesterday, November 6, the Supreme Court asked (read: required) the Solicitor General to express the views of the United States in an important preemption case from the Second Circuit, Riegel v. Medtronic.  The Court will consider the S.G.'s views before deciding whether to grant certiorari.  The question in Riegel is whether the Medical Device Amendments to the Food, Drug, and Cosmetic Act preempt state-law suits seeking damages for injuries from medical devices that have received FDA pre-market approval.  The circuits have been split on this question for seven years, and the state appellate courts are split as well.  My colleague, Allison Zieve, is the plaintiff's lead counsel.  Allison blogged about the case on October 19, and many of the key documents from the case are contained in that post.  In addition, SCOTUSblog reporter extraordinaire Lyle Denniston provided an excellent report yesterday on Riegel after the Supreme Court issued its "SG-advise" order.   If history is any guide, the S.G. will file his brief no earlier than May 2007.

Should FDA Premarket Approval Be a Liability Shield?

by Allison Zieve

Does the FDA's premarket approval of a medical device effectively immunize the manufacturer from liability for injuries caused by the device?  The courts are deeply divded over this question of federal preemption.  The pending cert petition in Riegel v. Medtronic, a case in which I represent the petitioners, offers the Supreme Court a chance to resolve that division and answer the question once and for all.  We filed our reply brief earlier this week and expect to find out on November 6 whether the Court will take the case.

Since the early 1990's, defendants have been arguing, and the federal courts have often held, that damages actions brought by consumers against medical device manufacturers are preempted by the 1976 Medical Device Amendments (MDA) to the Food, Drug, and Cosmetic Act.  Without getting into its complexities, the MDA's preemption provision, 21 U.S.C. 360k(a), provides that certain federal requirements applicable to medical devices preempt certain state-law medical device requirements.

We've been fighting these arguments for years.  In Medtronic v. Lohr, 518 U.S. 470 (1996), a case argued by my colleague Brian Wolfman, the Supreme Court rejected an attempt by a medical device manufacturer to immunize itself from tort liability by pointing to this preemption provision.  The Court held that, for the MDA to preempt a common-law claim, that claim must be developed "with respect to" devices and must correspond to a device-specific federal requirement.

Tackling the FDA's Preemption Arguments

by Deepak Gupta

Suits by injured consumers against drug companies and the regulation of drugs by the Food and Drug Administration have peacefully co-existed for many decades.  But since the Bush Administration came to Washington, the FDA has taken the position that consumers should not be able to sue drug companies for harm caused by medications.  Without citing any instance in which a verdict for a plaintiff has undermined federal regulation, the agency contends that lawsuits conflict with federal regulation by asking jurors to second-guess the FDA’s assessment of the safety of a drug and the adequacy of its label.  Emboldened by the FDA’s new view that federal regulation of drug labels preempts a broad range of personal injury claims, drug companies have been making motions to dismiss or for summary judgment in cases throughout the country.

Today, a group of public interest organizations filed this amicus brief, written by my colleague Allison Zieve, opposing a drug company's preemption arguments in a case before the U.S. Court of Appeals for the Third Circuit. The case, Colacicco v. Apotex and GlaxoSmithKline, was brought by a man whose wife committed suicide a few weeks after she began to take an SSRI antidepressant. He claims that the defendants failed to warn of the risk of suicide associated with the drug. (The drug’s label now carries such a warning.)