Academic journal article Journal of Corporation Law

Preemption Rights of National Bank Operating Subsidiaries: The Fight for Visitorial Power

Academic journal article Journal of Corporation Law

Preemption Rights of National Bank Operating Subsidiaries: The Fight for Visitorial Power

Article excerpt

I. INTRODUCTION

In May 2003, the United States District Court for the Eastern District of California decided Wells Fargo Bank v. Boutris,1 and enjoined the Commissioner of the California Department of Corporations (Commissioner) from asserting visitorial power over an operating subsidiary of a national bank.2 The decision has resulted in a firestorm across the country, causing heated debate among state and federal regulators. Critics of the decision are concerned about possible abuses of consumer protection and infringement on state sovereignty.

The ultimate question decided in Wells Fargo was whether the Commissioner was preempted by a regulation of the Office of the Comptroller of the Currency (OCC)3 from exercising visitorial power over an operating subsidiary of a national bank. Preemptive regulations issued by the OCC have long been a hot topic in the realm of national banks; however, they have just recently come into focus as a topic of concern in the area of operating subsidiaries. The courts have developed many tools to analyze administrative regulations and preemption.4 However, Wells Fargo provided the first chance for a court to consider administrative preemption in the context of operating subsidiaries of national banks.5

By using the previously developed tools to analyze the novel issue presented in Wells Fargo, this Note will argue that Wells Fargo was correctly decided . While many of the conclusions in the case seem unsupported, the holding actually has a strong legal and historical foundation. Part II outlines the facts and holding of Wells Fargo. It also provides a brief history of national bank preemption and the OCC's regulations concerning operating subsidiaries. Part III discusses the validity of the OCC's operating subsidiary regulations and, furthermore, who has authority to exert visitorial power over those operating subsidiaries. Most importantly, Part III also confronts the aftermath of Wells Fargo and argues that the resulting concerns over state sovereignty and consumer protection are unfounded. Part IV offers a suggestion on how to deal with the aftermath of Wells Fargo. The Note concludes that Wells Fargo was properly decided.

II. BACKGROUND

A. Facts of Wells Fargo Bank v. Boutris6

In a struggle for visitorial power7 over an operating subsidiary of a national bank, Wells Fargo Bank, N.A. (Wells Fargo) filed a lawsuit against the Commissioner of the California Department of Corporations. Wells Fargo sought a permanent injunction to enjoin the Commissioner from asserting visitorial power over its operating subsidiary.8 The OCC, in support of Wells Fargo, filed as amicus curiae in the case.9 The court decided the issue of whether the Commissioner was preempted by an OCC regulation from exercising visitorial power over an operating subsidiary of a national bank.10

The conflict arose from events surrounding the mortgage lending activities of Wells Fargo Home Mortgage, Inc. (WFHMI), a state-chartered corporation and operating subsidiary owned by Wells Fargo. Under the California Residential Mortgage Lending Act (CRMLA) and the California Finance Lenders Law (CFLL), WFHMI was licensed to perform real estate lending activities.11 The Commissioner is responsible for enforcing the CRMLA and the CFLL, and pursuant to this power, he "asserted regulatory, supervisory, examination and enforcement authority over WFHMI."12 In 2002, the Commissioner "demanded that WFHMI conduct an audit of its residential mortgage loans made in California during 2001 and 2002."13 The Commissioner was concerned WFHMI was charging interest in violation of a per diem statute, and he wanted WFHMI to make proper refunds.14

WFHMI objected to the audit, claiming that "because it is an operating subsidiary of a national bank it is subject to the OCC's exclusive regulatory authority."15 In its brief, the OCC agreed with this position, stating:

[bjecause federal law prohibits the [Commissioner] from exercising visitorial powers over a national bank engaged in real estate lending pursuant to federal law, the [Commissioner] may not exercise visitorial power over the national bank conducting that activity through an operating subsidiary licensed by the OCC, absent federal law dictating a contrary result. …

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