6th Cir.: Ohio mortgage law preempted

The Sixth Circuit held that, because of a federal regulation asserting field preemption, Ohio’s Mortgage Broker Act could not be applied to exclusive insurance agents for State Farm Bank.

The court stated there was no significant distinction between regulating exclusive agents and regulating State Farm directly, because the state law had a direct effect upon State Farm’s lending activities. The court found it unnecessary to consider the level of deference owed to interpretations by the federal Office of Thrift Supervision (OTS), but suggested agency interpretations regarding preemption are entitled to deference. State Farm Bank v. Reardon, --- F.3d ---, 2008 WL 3876196 (6th Cir. Aug. 22, 2008) (No. 07-4260).

 

          Ohio sought to force State Farm’s agents to comply with the state law’s licensing and registration requirements; the Ohio law also prohibits fraud, kickbacks and other mortgage-related abuses.  Federal law grants OTS plenary power to regulate federal savings associations (FSA), including State Farm. 12 C.F.R. § 560.2 states that “OTS hereby occupies the entire field of lending regulation for federal savings associations,” including licensing, registration and mortgage services, and excluding only those state laws that “only incidentally affect the lending operations” of an FSA.

 

            District courts have disagreed on the effect of this regulation on exclusive agents, largely due to their differing views of whether deference to agencies is appropriate on preemption issues. The panel sidestepped this issue, noting that the Supreme Court in Watters v. Wachovia Bank, 127 S.Ct. 1559 (2007) (summary here) decided the scope of banking preemption without addressing deference.

 

          The State’s central argument was that § 560.2 preempts only laws that directly regulate the actions of FSAs. The court rejected this argument, holding that the regulation preempts any law “affecting the operations” of FSAs, whether directly or through their agents. The court saw a close analogy to Watters, which held that the National Bank Act preempts state regulation of both national banks and their state-chartered operating subsidiaries. It also noted that SPGGC v. Ayotte, 488 F.3d 525 (1st Cir. 2007) extended Watters to banks’ third-party agents.

 

            Under those precedents, the scope of preemption was determined not by the entity regulated but the effect on the exercise of an FSA’s powers. Here, State Farm’s agents would be unable to comply with the Ohio law because they would lack the requisite experience, and State Farm would therefore be forced to change the way it does business. Thus, even though State Farm was not regulated directly its lending activities would be affected more than incidentally. Accordingly, the law was preempted.