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SIXTH CIRCUIT COURT FINDS STATE LAW PREEMPTED AS TO EXCLUSIVE AGENTS OF FEDERAL SAVINGS BANK

On August 22, 2008, the United States Court of Appeals for the Sixth Circuit held that the Office of Thrift Supervision ("OTS") preemption regulations preempted the application of the Ohio Mortgage Broker Act ("OMBA") to State Farm Bank’s exclusive agents. State Farm Bank, F.S.B. v. Reardon, --- F.3d ----, 2008 WL 3876196 (6th Cir., Aug. 22, 2008). The case arose when the Superintendent of the Ohio Division of Financial Institutions, John B. Reardon, declined to exempt State Farm Bank’s exclusive agents from compliance with the OMBA, despite an OTS opinion that federal law preempted application of the OMBA to the exclusive agents. The United States District Court for the Southern District of Ohio agreed with the Superintendent in holding that federal law does not preempt the application of the OMBA to the exclusive agents. State Farm Bank, F.S.B. v. Reardon, 2007 WL 2822793, Case No. C2-05-268 (S.D. Ohio, Oct. 1, 2007); see also DLT Alert "Ohio District Court Finds State Law Not Preempted as to Exclusive Agents of Federal Savings Bank" (Oct. 2, 2007).

State Farm Bank is a federal savings association, chartered by the OTS. Rather than maintaining bank branches or offices, State Farm Bank markets its financial products and services to the public primarily through independent contractors (i.e., its "exclusive agents"). The exclusive agents provide information to customers regarding financial products and services and assist customers in completing and submitting applications for loans to State Farm Bank. However, the exclusive agents do not evaluate loan applications, apply underwriting criteria, make lending decisions or receive loan payments; such activities are performed by employees of State Farm Bank’s loan operations office.

In reversing District Court’s decision, the Sixth Circuit Court held that the OMBA’s application to State Farm Bank’s exclusive agents fit within the categories of state laws that are expressly preempted by the OTS regulation. Such regulation preempts state laws that have a direct impact on the banking and lending activities of a federal savings association. The Sixth Circuit rejected the District Court’s "overly narrow" approach in drawing a distinction between state regulation of a federal savings association, its employees and subsidiaries who engage in lending and banking activities on behalf of an association and state regulation of exclusive agents who engage in the same conduct on behalf of an association.

The Sixth Circuit also relied on the United States Supreme Court’s decision in Watters v. Wachovia, which held that, in considering whether a state law is preempted by federal banking law, courts should focus on whether state law is regulating the exercise of a national bank’s power, not on whether the entity exercising that power is the bank itself. The Sixth Circuit Court concluded that the OMBA directly regulates State Farm Bank’s exclusive agents rather than State Farm Bank itself, but that the activity being regulated is the solicitation an origination of mortgages – a power given to State Farm Bank by the Home Owners’ Loan Act and the OTS. By requiring State Farm Bank’s exclusive agents to satisfy the OMBA’s fairly onerous licensing and registration requirements, the Superintendent was purporting to regulate or otherwise affect the credit activities of State Farm Bank, and thus the OMBA was preempted by federal law.

In a footnote, the Sixth Circuit noted that the Housing and Economic Recovery Act of 2008 ("HERA") could supercede the court’s opinion in the future, but until Ohio passes a law in compliance with the HERA, application of the OMBA to State Farm Bank’s exclusive agents is preempted.

  • Mike Tomkies and Elizabeth Anstaett