The OTS issued a letter concluding that federal preemption is available to a federal savings bank’s second-tier operating subsidiary to the same extent that preemption is available to the FSB. OTS Letter P-2006-6 from John E. Bowman, Chief Counsel (July 20, 2006).

The letter responded to an inquiry from an FSB that was reorganizing and intended to create a direct subsidiary that would own a mortgage company. The mortgage company would be a second-tier subsidiary of the FSB with its principal office in a different state than the home office of the FSB.

The OTS stated that assuming the OTS approves the proposed reorganization, based on OTS regulations, federal preemption will be available to the second-tier operating subsidiary mortgage company to the same extent as available to the FSB. Specifically, state laws purporting to impose requirements regarding licensing, registration and lending that do not apply to FSBs will not apply to the mortgage company.

Additionally, the OTS stated that federal law will apply to the mortgage company. After reviewing Section 4(g) of the Home Owners Loan Act and OTS regulation Sections 560.110, the OTS concluded that since the FSB may use and export the most favored lender interest rate permitted under its home state law if the FSB’s home office is located in that state, the mortgage company may also use and export the most favored lender interest rate of the FSB’s home state. This conclusion was based on OTS regulation Section 559.3(h)(1), which states “[u]nless otherwise specifically provided by statute, regulation or OTS policy, all federal statutes and regulations apply to operating subsidiaries in the same manner as they apply to [the parent federal savings association].”

The letter responded to an issue not previously addressed by the OTS, namely, whether a FSB’s operating subsidiary located in, and making loans from, a state where the parent FSB does not have a home office or a branch office, may utilize and export the most favored lender interest rate of the parent FSB’s home office state.

Elizabeth Anstaett and Darrell Dreher