State Farm Ruling Called a Big Gain for Preemption
Kaper, Stacy, American Banker
WASHINGTON -- A federal court's decision to allow a thrift's independent contractors to disregard state licensing laws could mark a significant extension of the Office of Thrift Supervision's preemption powers, lawyers said.
The U.S. District Court for the District of Connecticut in New Haven ruled last week that the Home Owners Loan Act preempted state and local laws for exclusive agents selling mortgage products for State Farm Bank.
Industry lawyers said the ruling was the first that covered third parties working for a thrift.
"Preemption usually applies to the institutions or to its subsidiaries, but to have it apply to independent entities, it really opens up the door to a lot more distribution possibilities" for bank products, said Gregory Lyons, the chairman of Goodwin Procter LLP's financial services practice in Boston.
State Farm Bank relies on independent agents who are not technically its employees but who exclusively sell State Farm Group's insurance and commercial retail bank products.
Frazer Engerman, a spokesman for the company, said agents have had to comply with the mortgage and broker license requirements of 19 states.
Since the thrift opened in 1999 it has sought clarification on whether the agents must comply with state laws, arguing that "dual regulation is unnecessary, costly, and not in the best interest of our customers," Mr. Engerman said.
In 2004, John Bowman, the OTS' chief counsel, wrote that local laws were preempted for the thrift's agents.
"The comprehensiveness of the HOLA language demonstrates that Congress intended the federal scheme to be exclusive, leaving no room for state regulation, conflicting or complementary," Mr. Bowman wrote.
Judge Janet Bond Arterton agreed with that assessment in her ruling last week.
"Given the broad mandates provided by HOLA and OTS regulations, federal savings associations are to decide how to structure their operations and conduct their business, including conducting their activities through subsidiaries and third-party independent contractors," she wrote.
Howard Cayne, a partner with Arnold & Porter LLP, the firm that represented State Farm Bank, said the ruling "confirms the position of the OTS that states may not regulate the banking-related activities of federally chartered savings institutions, including the marketing activities of their supervised agents. …