August 27, 2008

Sixth Circuit Holds Ohio Mortgage Broker Act Licensing and Registration Requirements Preempted by Federal Law

On August 22, 2008, the Sixth Circuit held that federal law preempts application of the Ohio Mortgage Brokers Act (“OMBA”) to exclusive agents serving as mortgage lenders and banking agents.  Full text of the Court's opinion.

Facts

State Farm Bank is a federal savings association and wholly owned subsidiary of State Farm Mutual Automobile Insurance Company. State Farm Bank does not have physical branch locations, but solicits and markets its mortgage and banking products through its network of independent and exclusive insurance agents specially trained to serve as mortgage and banking agents. 

Under the Home Owners’ Loan Act, the Office of Thrift Supervision (“OTS”) within the United States Department of Treasury regulates and supervises State Farm Bank and other federal savings associations. Despite an official OTS Opinion agreeing with State Farm Bank’s assertion that federal law preempts the licensing and registration requirements of the OMBA, , the superintendent of the Ohio Division of Financial Institutions (the “Superintendent”) refused to exempt State Farm Bank’s exclusive agents from OMBA compliance. State Farm Bank and one of its Ohio agents filed this action seeking injunctive relief and a declaratory judgment.

Analysis

The Court phrased the question at issue rather simply: “Does federal law preempt the application of the Ohio Act to State Farm Bank’s exclusive agents?” In a straightforward analysis of the federal statute, the Sixth Circuit Court held the OMBA is preempted on this narrow issue, which follows established precedents from other districts.

The Court characterized the lower court’s ruling as “overly narrow.” The lower court had distinguished between “state regulation of a federal savings association, its employees, and subsidiaries” engaged in lending and banking activities, and “state regulation of exclusive agents who engage in the same conduct on behalf of an association.” The Court noted the OTS was granted “plenary authority” regarding federal savings associations.

In line with this authority, the OTS had promulgated two federal regulations addressing preemption. These regulations list types of preempted state laws, including “Licensing, registration” laws. 12 C.F.R. 560.2(b). The Court ruled this statute expressly preempted the OMBA regulations. Additionally, the First and Ninth Circuits had ruled in analogous situations that federal law preempted state laws that attempt to regulate federal savings associations. 

The Court also disagreed with the Superintendent’s assertion that the federal regulations were inapplicable because they govern State Farm Bank, its employees and subsidiaries, but not the bank’s exclusive agents, to whom the OMBA applies. Basing its analysis on United States Supreme Court precedent, the Sixth Circuit held that the focal point of preemption questions in the banking industry is not on the corporate structure of the bank or the particular entity exercising the power, but whether the state laws, generally, are regulating a national bank’s power. 

Holding that the OMBA’s regulations were preempted by federal laws regulating federal savings associations, the Court noted that subjecting exclusive agents to numerous state regulations would be both unduly burdensome and at odds with the purpose of federal regulation in this area. Further, it stated that if Ohio’s laws were not preempted, State Farm Bank would have to change its corporate structure or forego mortgage lending in Ohio – despite being authorized to do so under OTS federal regulations.

Limitations

Though seemingly a broad holding, the Sixth Circuit noted throughout its decision the narrow nature of the ruling. The first footnote of the decision states that the recently enacted Housing and Economic Recovery Act of 2008 (“HERA”) will likely supersede the opinion as Ohio will have to pass new laws to comply with this legislation. However, because states have one year to comply with the federal legislation, the Court’s ruling remains in force.

In another footnote, the Court stated that the agents at issue are exclusive, trained and subject to oversight from State Farm Bank itself. As such, this ruling prevents duplicative regulations upon these agents. The decision would likely vary in the case of non-exclusive, untrained, and unsupervised individuals. Although the Court does not identify where these distinguishing lines are drawn, these distinctions may lead to more litigation in spite of HERA and Ohio’s future legislation. 

This E-alert was prepared by Francisco Luttecke. Please contact any member of the Bricker & Eckler Creditor Rights & Bankruptcy group for more information.