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SIXTH CIRCUIT UPHOLDS OCC OPERATING SUBSIDIARY RULE

The United States Court of Appeals for the Sixth Circuit upheld the decision of the United States District Court for the Western District of Michigan finding that it was within the Office of the Comptroller of the Currency’s authority to promulgate Rule 7.4006 relating to operating subsidiaries. Wachovia Bank, N.A. v. Watters , No. 04-2257, 2005 WL 3453909 (6th Cir. Dec. 19, 2005).

The case was brought by Wachovia Bank, N.A., a national bank, and Wachovia Mortgage Company, a wholly owned operating subsidiary of Wachovia Bank. Plaintiffs sought declaratory and injunctive relief against the Commissioner of the Michigan Office of Insurance and Financial Services attempt to prevent Wachovia Mortgage Company from conducting mortgage lending activities in Michigan. The Commissioner argued that the OCC exceeded its authority by promulgating 12 C.F.R. § 7.4006, the regulation limiting the application of state laws to national bank operating subsidiaries to the same extent as they apply to national banks. The Commissioner contended that the regulation impermissibly expands the definition of “national bank.” The Commissioner took the position that a national bank’s wholly owned operating subsidiary is subject to state law, including licensing requirements.

The Sixth Circuit found that the district court appropriately conducted its analysis pursuant to Chevron and concluded that the regulations are within the OCC's authority and are a reasonable interpretation of the statute. The Sixth Circuit stated that contrary to Michigan’s arguments, the OCC regulations do not expand the definition of “national bank” as Congress used it in 12 U.S.C. § 484 to include an "operating subsidiary," such as Wachovia Mortgage. Rather, the Sixth Circuit found that the OCC regulations interpret a national bank's "incidental powers" under 12 U.S.C. § 24(Seventh) to include the power to conduct business through an operating subsidiary. The Sixth Circuit stated that the OCC has the authority to define a national bank’s “incidental powers” to include conducting the business of banking through an operating subsidiary. The Sixth Circuit agreed with the Second Circuit that the OCC regulations reflect a consistent and well-reasoned approach to preempting state regulation of operating subsidiaries so as to avoid interference with national banks’ exercise of their powers under 12 U.S.C. § 24(Seventh) and their ability to use operating subsidiaries in the dynamic market of banking and real state lending. Thus, the Sixth Circuit affirmed the district court’s holding that the Michigan law is preempted as to a national bank’s operating subsidiary.

Jeff Langer and Elizabeth Anstaett