Wfs Financial Inc. v. Dean, 99-C-0345-C.

Citation79 F.Supp.2d 1024
Decision Date26 November 1999
Docket NumberNo. 99-C-0345-C.,99-C-0345-C.
PartiesWFS FINANCIAL INC., Plaintiff, v. Richard L. DEAN, Secretary, Wisconsin Department of Financial Institutions; Jean Plale, Director, Licensed Financial Services Unit, Wisconsin Department of Financial Institutions; Michael Mach, Administrator, Division Banking, Wisconsin Department of Financial Institutions; and James Doyle, Attorney General, State of Wisconsin, in their official capacities, Defendants.
CourtU.S. District Court — Western District of Wisconsin

Russell S. Long, Davis & Kuelthau, S.C., Milwaukee, WI, for WFS Financial Inc.

Stephen J. Nicks, Asst. Atty. General, Madison, WI, for Defendants.

OPINION AND ORDER

CRABB, District Judge.

Plaintiff WFS Financial brings this civil action for declaratory and injunctive relief, seeking a determination that it is not subject to Wisconsin laws regulating lending activities because it is an operating subsidiary of a federal savings bank. Defendants are all state officials involved in the oversight or enforcement of the Wisconsin regulatory statutes at issue. Defendants dispute plaintiff's contention that the Office of Thrift Supervision acted within its authority and discretion in extending the benefits of federal preemption enjoyed by federal savings banks to the operating subsidiaries of such banks and they intend to continue to subject plaintiff to the laws and regulations of the state of Wisconsin governing sales finance companies such as plaintiff.

I conclude that the Office of Thrift Supervision acted non-arbitrarily and well within its delegated authority to advance the purposes of the Home Owners' Loan Act of 1933, 12 U.S.C. §§ 1461-1470, when it promulgated the regulations allowing federal savings and loan associations to acquire and operate subsidiaries that would be regulated by the office in the same manner as their parent organizations and equally exempt from state regulation. From this conclusion, it follows that defendants may not apply any regulations to operating subsidiaries that they do not apply to federal savings and loan associations. Plaintiff's request for declaratory and injunctive relief will be granted.

The parties have an actual controversy involving the interpretation of federal law. Therefore, this court has subject matter jurisdiction to hear the case. 28 U.S.C. § 1331.

For the purpose of deciding this motion, I find that the following facts from the parties' stipulation.

UNDISPUTED FACTS

Plaintiff WFS Financial Inc. is a subsidiary of Western Financial Bank, which is a federal savings bank organized and operating under the Home Owners' Loan Act of 1933, 12 U.S.C. §§ 1461-1470, and the regulations of the Office of Thrift Supervision. Effective April 6, 1995, the Office of Thrift Supervision approved Western Financial Bank's application to designate WFS, known then as Westcorp Financial Services, Inc., as an operating subsidiary under the Office of Thrift Supervision regulations. Except for a name change, plaintiff's corporate structure and operations have not changed materially since its approval as an operating subsidiary of Western Financial Bank.

Western Financial Bank owns approximately 87% of the outstanding shares of plaintiff's common stock and exercises effective operating control of plaintiff. Plaintiff is a corporation duly organized under the laws of California. It is engaged in only those activities that are permitted for federal savings associations. It services automobile loan contracts originating in 42 states and, in addition, it purchases loans from automobile dealers and originates direct automobile loans.

Plaintiff has a certificate of authority issued by the state of Wisconsin to transact business in the state and is categorized by the state as a "sales finance company." Plaintiff holds sales finance company licenses under Wis. Stat. § 218.01; engages in "consumer transactions"; is registered under the Wisconsin Consumer Act; and pays certain fees to obtain the sales finance company licenses and to register under state law. Plaintiff has one office in this state. At present, 100% of its business in Wisconsin is dependent on the purchase of auto loan contracts from dealers. It makes no direct automobile loans in Wisconsin.

Plaintiff has written to the state to register its objection to being required to obtain licenses and to register under state law. Defendant Plale has advised plaintiff that the state does not agree with plaintiff's position that federal law preempts state regulation of sales finance company activity conducted by subsidiaries of federally chartered thrift institutions and that plaintiff's failure to maintain its license under Wisconsin law could subject it to the penalties set forth in Wis. Stat. § 218.01(2)(a) and put in jeopardy the licenses of the dealers from which plaintiff purchases contracts or leases.

In response to another letter from plaintiff to the effect that it was renewing its Wisconsin Consumer Act Registration under protest, defendant Plale wrote to plaintiff to say "that the Division of Banking [] does not recognize or give deference to assertions that the Office of Thrift Supervision [] has preempted State regulation of sales finance company activity conducted by subsidiaries of federallychartered thrift institutions." Parties' Stip. ¶ 16, Exh. D.

OPINION

In an effort to ameliorate the deplorable condition of the home-financing industry in the 1930's after the failure of 1,700 state chartered savings and loan institutions, Congress enacted the Home Owners' Loan Act. The act was intended to be "a radical and comprehensive response to the inadequacies of the existing state systems.'" Fidelity Federal Savings & Loan Assn. v. de la Cuesta, 458 U.S. 141, 160, 102 S.Ct. 3014, 73 L.Ed.2d 664 (1982) (quoting Conference of Federal Savings & Loans Assns. v. Stein, 604 F.2d 1256, 1257 (9th Cir. 1979)). It provided for the creation of a system of federal savings and loan associations to be regulated by the Federal Home Loan Bank Board. In section 5 of the act, Congress gave the board extensive authority to take such actions as the board thought would best advance the purposes of the act. The section, now codified at 12 U.S.C. § 1464(a) provides:

In order to provide thrift organizations for the deposit or investment of funds and for the extension of credit for homes and other goods and services, the Board is authorized, under such rules and regulations as it may prescribe, to provide for the organization, incorporation, examination, operation, and regulation of associations to be known as Federal savings and loan associations, or Federal savings banks, and to issue charters therefor, giving primary consideration to the best practices of thrift institutions in the United States. The lending and investment authorities are conferred by this section to provide such institutions the flexibility necessary to maintain their role of providing credit for housing.

Broader authority would be hard to imagine.

In 12 U.S.C. § 1462a(b), Congress delegated to the board's successor, the Office of Thrift Supervision, authority to "prescribe such regulations and issue such orders as the Director may determine to be necessary for carrying out this chapter ...." In 1992, the Office of Thrift Supervision acted pursuant to its delegated authority under §§ 1462a, 1463, 1464 and 1828, and proposed regulations to amend 12 C.F.R. Part 545 to add § 545.81, which would allow savings and loan associations to establish and acquire "operating subsidiaries." See 57 Fed.Reg. 12,228, 48,942 (1992) and 61 Fed.Reg. 66,561 (1996); see also 12 C.F.R. § 545.81. The regulations were promulgated in final form in 1992. They provide that an operating subsidiary may engage in only those activities its parent is legally authorized to undertake directly; the parent must own at least 50 percent of the corporation's outstanding voting stock; and no other party can have effective operating control of the corporation. The operating subsidiary is subject to the same federal regulations as its parent and is treated as a department or division of its parent for regulatory purposes. Further, state laws otherwise applicable to the activities of the operating subsidiary are preempted to the same extent as they would be if the activities were being carried out directly by the parent savings and loan association.

It is indisputable that federal agencies may promulgate regulations that preempt state law. Their authority flows from the supremacy clause of the Constitution, Art. VI, cl. 2, which gives Congress the authority either to enact legislation preempting state law or to delegate the same authority to its executive agencies. See ...

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