National City Bank of Indiana v. Turnbaugh, No. CIV.A. CCB-04-2719.

Citation367 F.Supp.2d 805
Decision Date05 May 2005
Docket NumberNo. CIV.A. CCB-04-2719.
PartiesNATIONAL CITY BANK OF INDIANA, et al., v. Charles W. TURNBAUGH, Commissioner of Financial Regulation, Maryland Department of Labor, Licensing and Regulation.
CourtUnited States District Courts. 4th Circuit. United States District Court (Maryland)

Douglas Bradford Jordan, Office of the Comptroller of Currency, Washington, DC, as amicus curiae supporting plaintiffs.

MEMORANDUM

BLAKE, District Judge.

National City Bank of Indiana ("National City Bank" or "the Bank"), a national bank that provides mortgage services to homeowners in Maryland through its wholly-owned operating subsidiaries First Franklin Financial Corporation ("First Franklin") and National City Mortgage Company ("National City Mortgage"), has filed suit along with its subsidiaries seeking declaratory and injunctive relief enjoining the Maryland Department of Labor, Licensing, and Regulation from enforcing Md.Code Ann. Com. Law § 12-105(b)(4), a Maryland law that restricts the amount of prepayment fees mortgage lenders may impose, on the theory that the Maryland law is preempted under the Supremacy Clause of the Constitution by the National Bank Act and the associated regulations promulgated by the federal Office of the Comptroller of the Currency ("OCC"). National City Bank also contends that, as a national bank, its operating subsidiaries are subject to the exclusive regulatory and supervisory authority of the OCC, and that therefore Maryland is preempted from exercising any regulatory or visitorial powers over its subsidiaries under the Maryland Mortgage Lender Law, Md.Code Ann. Fin. Inst. §§ 11-501, et seq. After the parties reached an agreement as to a preliminary injunction pending the outcome of this litigation,1 the plaintiff National City Bank, along with its subsidiaries, moved for summary judgment and a permanent injunction (docket entry no. 24), and the defendant Charles W. Turnbaugh, Commissioner of Financial Regulation of the Maryland Department of Labor, Licensing and Regulation ("Commissioner") responded with a cross-motion for summary judgment (docket entry no. 30).2 Oral argument was heard on January 28, 2005. For the reasons stated below, I find that Maryland's laws are preempted under Article VI of the Constitution by the National Bank Act, 12 U.S.C. § § 24(Seventh), 371, 484, and the OCC implementing regulations, including 12 C.F.R. §§ 5.34, 7.4000, 7.4006, 34.21, and 34.23. The defendant's motion for summary judgment will be denied, the plaintiffs' motion for summary judgment will be granted and a permanent injunction enjoining the Commissioner from enforcing the questioned Maryland state laws against National City Bank's operating subsidiaries shall be entered.3

BACKGROUND

The following facts are undisputed. Plaintiff National City Bank of Indiana is a national banking association organized and existing under the National Bank Act, 12 U.S.C. § 21 et seq. National City Bank's principal place of business is Indianapolis, Indiana and it maintains no branch offices in Maryland. (See Pls.' Mot. for Summ. J., Ex. 4, Decl. of Mary McGuirk at ¶ 2.) National City Bank wholly owns and operates First Franklin and National City Mortgage as operating subsidiaries to conduct the Bank's residential mortgage lending. (Id. at ¶ ¶ 3, 4.) First Franklin is incorporated in Delaware and its principal place of business is San Jose, California. (Id. ¶ 3.) National City Mortgage is incorporated in Ohio and its principal place of business is Miamisburg, Ohio. (Id. ¶ 4.) Both First Franklin and National City Mortgage engage in residential mortgage lending throughout the United States and in Maryland. (Id. ¶ ¶ 3, 4.) Both operating subsidiaries provide Adjustable Rate Mortgages ("ARMs") in Maryland, some of which impose prepayment penalties in conflict with Maryland law. (Id. ¶ ¶ 5, 6.)

The defendant Commissioner is the state official charged with enforcing the Maryland Mortgage Lender Law ("MMLL"), Md.Code Ann. Fin. Inst. §§ 11-501, et seq., which provides for the licensing, regulation, supervision, examination, and enforcement of applicable laws for Maryland residential mortgage lenders. The Commissioner is also responsible for ensuring that licensed mortgage lenders comply with Md.Code Ann. Com. Law § 12-105(b)(4) ("Maryland Prepayment Restriction"), a provision that restricts the prepayment penalties lenders may impose on mortgagees.

According to the defendant, National City Mortgage was first licensed under the MMLL in June 1989; it currently has 62 licenses to do mortgage lending in Maryland. (Def.'s Cross Mot. for Summ. J. at 5.) National City Mortgage has 30 locations in Maryland and 32 locations out of the state that do business in Maryland. (Id.) First Franklin was licensed in Maryland under the MMLL from 1994 through December 31, 2003, when it did not renew its licenses. (Id. at 6.) When it was licensed, First Franklin held twelve licenses to do mortgage lending at three locations in Maryland and nine locations outside of Maryland. (Id. at 7.) Over the years the Commissioner has performed numerous examinations of the books and records of National City Mortgage and First Franklin to ensure compliance with the MMLL, as well as investigated some consumer complaints filed against the lenders. (Id. at 6-7.)

The present controversy arose from two consumer complaints filed with the Commissioner against First Franklin in June and July of 2004. In response to the first complaint, Marcia Tonkins, a Financial Examiner in the Office of the Commissioner, sent a letter to First Franklin stating that the bank's Prepayment Note Addendum appeared to violate the Maryland Prepayment Restriction, which provides that "a lender may charge a prepayment penalty not exceeding two months' advance interest on the total amount of all prepayments made in any 12-month period in excess of one third of the amount of the original loan." (See Pls.' Mot. for Summ. J., Ex. A, June 29, 2004 letter from Marcia Tonkins). Tonkins asked First Franklin to provide "a list of all Maryland residents charged a prepayment penalty after July 1, 2003." (Id.) First Franklin responded with a letter stating that it would waive the prepayment penalty for the loan in question, but asserting that such penalties are permissible under federal law, and therefore the Commissioner had no need for a list of Maryland residents charged a prepayment penalty after July 1, 2003. (Id., Ex. B, July 20, 2004 letter from Deborah Novacek.) The second consumer complaint was received by the Commissioner in July 2004. It stated in pertinent part that "I signed this mortgage note being aware of the prepayment penalty. However, I was informed by friends that prepayment penalties are illegal in the state of MD. I am in the process of selling my house and I need to know if I will have to pay the penalty." (Id., Ex. C., July 20, 2004 letter.) The complaint was forwarded to First Franklin, which responded to the consumer with the explanation that the prepayment penalty is permissible under federal law. (Id., Ex. D, Aug. 11, 2004 letter from Mary McGuirk.) To prevent any further action by the Commissioner, National City Bank filed this suit on August 20, 2004.4

ANALYSIS

This case presents solely questions of law and therefore should be resolved on summary judgment.5 The issue before the court is whether the Maryland Commissioner's efforts to exercise licensing and visitorial powers over the operating subsidiaries of national banks in Maryland, including the effort to enforce a Maryland law prohibiting mortgage prepayment penalties, are preempted by the National Bank Act and the regulations promulgated thereunder by the OCC. This court finds, consistent with several other federal district courts' review of similar cases, that the Maryland laws are preempted by the federal regulatory regime established pursuant to the National Bank Act. See Wachovia Bank, N.A. v. Burke, 319 F.Supp.2d 275 (D.Conn.2004), appeal docketed, No. 04-3770 (2d Cir.); Wachovia Bank, N.A. v. Watters, 334 F.Supp.2d 957 (W.D.Mich.2004), appeal docketed, No. 04-2257 (6th Cir.); Wells Fargo Bank, N.A. v. Boutris, 265 F.Supp.2d 1162 (E.D.Cal.2003), appeal docketed, No. 03-16194 (9th Cir.); National City Bank of Indiana v. Boutris, 2003 WL 21536818 (E.D.Cal. July 2, 2003), appeal docketed, No. 03-16461 (9th Cir.).

I. National Legal Framework

National City Bank is chartered and organized under the National Bank Act, 12 U.S.C. § 21 et seq. ("the Act"), a law enacted by Congress in 1864 to "protect national banks against intrusive regulation by the States," in order to "`facilitate ... a national banking system.'" Bank of America v. City and County of San Francisco, 309 F.3d 551, 561 (9th Cir.2002) (quoting Marquette Nat'l Bank v. First of Omaha Serv. Corp., 439 U.S. 299, 314-315, 99 S.Ct. 540, 549, 58 L.Ed.2d 534 (1978)). The OCC is a bureau of the U.S. Treasury Department charged with licensing, examining, and regulating the national banks under the National Bank Act and other federal banking laws. Accordingly, "considerable weight should be accorded" to its "construction of [the] statutory scheme it is entrusted to administer." Chevron U.S.A., Inc. v. Natural Resources Defense Council, 467 U.S. 837, 844, 104 S.Ct. 2778, 2782, 81 L.Ed.2d 694 (1984).

Three related statutes and regulations issued thereunder are particularly pertinent to the analysis.6 First, Congress endowed national banks with specific banking powers, such as receiving deposits and loaning money, as well as the general authority to exercise "all...

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