State Farm Bank, F.S.B. v. Reardon, C2-05-268.
| Decision Date | 28 September 2007 |
| Docket Number | No. C2-05-268.,C2-05-268. |
| Citation | 512 F.Supp.2d 1107 |
| Court | U.S. District Court — Southern District of Ohio |
| Parties | STATE FARM BANK, F.S.B., et al., Plaintiffs, v. John B. REARDON, Superintendent of the Ohio Division of Financial Institutions, Defendant.<SMALL><SUP>1</SUP></SMALL> |
Thomas Leslie Long, Mark Alan Johnson, Baker & Hostetler, Columbus, OH, Anthony Patrick Doyle, Howard N. Cayne, Nancy L. Perkins, Arnold & Porter LLP, Washington, DC, for Plaintiffs.
William J. Cole, Ohio Attorney General, Columbus, OH, for Defendant.
This matter is now before the Court for consideration of the parties' Cross-Motions for Summary Judgment. This case calls upon the Court to determine whether the Office of Thrift Supervision ("OTS") has lawfully preempted, in part, Ohio law requiring independent mortgage brokers to obtain licenses from the State before marketing first and second mortgages. The Court concludes that, while the OTS may have the authority to extend federal preemption to agents of federal depository institutions, it has failed to comply with the Administrative Procedure Act in its efforts to do so. For the reasons that follow, Plaintiffs' Motion for Summary Judgment is denied; Defendant's Motion for Summary Judgment is granted.
At the core, this case involves a potential conflict between federal law regulating federal savings associations and state law licensing and regulating mortgage brokers. There is no dispute that state law regarding mortgage brokers does not apply to employees of a federal savings association or its subsidiaries. What is in dispute is whether current federal law and regulation prohibit state licensing of independent mortgage brokers who solicit loans exclusively for federal savings associations.
As described in detail below, the Plaintiff seeks to solicit mortgages through 702 independent insurance agents who otherwise market insurance products for State Farm Mutual, an insurance company which owns State Farm Bank, a federal savings association. The Plaintiff, State Farm Bank, proposes to market mortgages through the same independent State Farm Mutual insurance agents. As proposed by the Plaintiff, these independent agents would refer mortgage applications only to State Farm Bank, would undergo special training regarding mortgages, and would be supervised by State Farm Bank.
Under federal law, the Director of the Office of Thrift Supervision has been given broad authority to issue regulations as to the operation of federal savings banks. As described below, federal law clearly expresses Congressional intent that federal savings banks operate under a uniform national system. The Director is, therefore, authorized by federal law to issue regulations that may preempt, or supercede, state laws to the contrary.
State Farm Bank presented its proposed business model, involving insurance agents as solicitors of mortgages, for review by the Office of Thrift Supervision. The agency's chief counsel responded with a lengthy letter which essentially concluded that the laws of twelve states, as to the licensing of mortgage brokers under the terms proposed by State Farm Bank, were in conflict with federal regulations regarding federal savings associations.
State Farm Bank then sent a copy of the letter to the Superintendent of the Ohio Division of Financial Institutions, advising him that the chief counsel had determined that the state law regarding licensing of mortgage banks was unconstitutional, as applied to independent agents of State Farm Bank. State Farm Bank requested a determination from the Superintendent that the state licensing scheme would not apply to the independent agents with whom the bank intended to contract for purposes of soliciting mortgages. The Superintendent maintained that state law had not been displaced and the state statutes would be enforced, thereby setting the stage for this lawsuit.
Under the Constitution, Congress is authorized to legislate in specific areas, as in the regulation of interstate commerce, relevant to this case. The Constitution expressly states that the law of the United States "shall be the Supreme law of the land." U.S. Const. art. VI, cl. 2. In those areas in which Congress is not authorized to legislate, the states retain sovereignty to legislate and determine public policy.
As to this case, a dispute affecting comity between federal and state authority has been, in the Court's view, unnecessarily created. Before the letter from chief counsel of the Office of Thrift Supervision to State Farm Bank, the federal agency had never before expressly regulated, or excluded from state regulation, independent third-parties soliciting mortgage loans for a federal savings association. This rather dramatic change in the federal regulatory scheme came, not with a formal regulation issued after publication and public hearing, but through a letter signed by counsel, not the Director, who is the only person authorized under federal law to issue regulations. The State of Ohio was never asked for comment, nor even given formal notice of the federal agency's new position. Instead, a private party was issued an opinion letter from the federal agency's counsel; the private party then notified the State of Ohio, for the first time, that the agency contended that Ohio law had been preempted by the agency's actions.
While federal law is undisputedly supreme, the scenario just described is assuredly not what the Framers of the Constitution had in mind. State law may have to yield to federal law or regulation; it need not yield in the first instance to a letter issued by agency counsel to a private party purporting to invalidate the operation of a state statute.
The Administrative Procedure Act, subsequently described in detail, dovetails with proper consideration of the federal-state relationship by federal agencies. This Act requires that, before substantive rules become law, a federal agency must give public or actual notice to interested parties and the public that a regulation has been proposed. Interested parties must then be given a chance for comment before the regulation becomes law. Failure to comply with the Administrative Procedure Act renders the agency's actions illegal and of no effect.
Here, the agency made no attempt to comply with those requirements. Neither the State of Ohio nor many other interested parties were given the chance to comment on the new position of the agency. This is particularly noteworthy given the fact that the State of Ohio, and many other states, are experiencing a mortgage foreclosure crisis. While external events such as foreclosure actions cannot be the basis for invalidation of a rule, these same circumstances underscore the requirement of the Administrative Procedure Act that actions of agencies on matters of public concern be aired and debated.
The Office of Thrift Supervision does not propose to issue federal licenses to mortgage brokers. Instead, a new category of mortgage brokers, not licensed by either the federal or state government, is envisioned by the agency's new policy. Such a change is precisely what is required by the Administrative Procedure Act to be submitted for comment and review. Because this procedure was not done, this Court concludes that the agency's position in the opinion letter is of no legal force and that the Ohio statutes regarding the licensing of mortgage brokers have not been preempted.
To be clear, the Office of Thrift Supervision may have the lawful authority to preempt the Ohio statutes at issue in this case, as specifically proposed in the opinion letter. While the agency may have the actual authority to take such steps, it must do so in accordance with the Administrative Procedure Act. It is not too much a burden to expect such compliance before a federal agency preempts the laws of twelve states.
The parties have stipulated the following facts:
1. Plaintiff State Farm Bank, F.S.B. ("State Farm Bank"), is a federal savings association chartered by the Office of Thrift Supervision under the Home Owners' Loan Act, 12 U.S.C. § 1461 et seq.
2. Under the Home Owners' Loan Act, The Office of Thrift Supervision ("OTS"), an office within the United States Department of the Treasury, regulates, supervises and examines State Farm Bank.
3. State Farm Bank is a wholly owned subsidiary of State Farm Mutual Automobile Insurance Company ("State Farm Mutual") and is headquartered in Bloomington, Illinois.
4. State Farm Bank offers financial products and services, including first and second mortgages and home equity lines of credit, to customers and potential customers nationwide. However, State Farm Bank does not maintain any branches, nor does it maintain any Bank offices that are open to the public.
5. State Farm Bank markets its financial products and services to the public primarily through independent contractors, who also are licensed insurance agents of State Farm Mutual and who market insurance exclusively for or as otherwise authorized by State Farm Mutual. The majority of State Farm Bank's independent contractor agents are individuals who maintain sole proprietorships, but some of the independent contractor agents are incorporated businesses.
6. State Farm Bank requires each independent contractor agent who acts on behalf of State Farm Bank to enter into an exclusive agency agreement with State Farm Bank under which the contractor is permitted to market bank products and services only for State Farm Bank and not for any other banking or lending institution. A true and correct copy of the form of the agreement is attached hereto as Exhibit A.
7. The State Farm Bank independent contractor agents provide information to customers regarding the financial products and services offered by State Farm Bank and assist customers in completing and submitting applications for...
To continue reading
Request your trial
-
State Farm Bank v. Reardon, 07-4260.
...agents who perform lending and banking activities on behalf of a federal savings association. See State Farm Bank, F.S.B. v. Reardon, 512 F.Supp.2d 1107, 1119 (S.D.Ohio 2007). Thus, the court below drew a distinction between state regulation of a federal savings association, its employees, ......