November 2006
Watters v. Wachovia Bank: The Roberts Court Weighs in on Preemption
The Bush administration’s efforts to achieve tort reform through regulatory agency preemption has garnered much academic and press coverage. On November 29, 2006, the Supreme Court heard oral argument in the case of Watters v. Wachovia Bank. At issue was the scope of the National Bank Act and federal regulation, with Wachovia Bank successfully arguing in the Sixth Circuit Court of Appeals that federal regulations preempt Michigan laws regarding Wachovia’s lending activities. The Supreme Court’s decision is important not just because of its effect on banking regulation, but also because it serves as a Roberts Court precedent on the question of how much authority federal regulatory agencies such as the Food and Drug Administration and the National Highway Traffic Safety Administration have to decide to preempt state law.
Does federal banking law bar states from regulating the activities of state-chartered subsidiaries of national banks? What should the appropriate scope of the National Bank Act be? Does state regulation of national banks help or hurt consumers? How much deference should be given to federal agencies’ determinations that their regulations preempt state law? Panelists at a November 28 AEI discussion considered the legal, economic, and policy issues involved.
Brian P. Brooks
O’Melveny & Myers LLP
The debate here clearly goes deeper than whether operating subsidiaries of national banks should be subject to state law. In fact, it goes back to Alexander Hamilton and Thomas Jefferson’s debate over the existence of a national bank, and jurisprudentially, to John Marshall’s opinion in McCulloch v. Maryland. For better or worse, the Hamiltonian position has prevailed, and throughout the history of the republic, federal courts have protected national banks from the misguided populist attacks of state legislators. This case is nothing new, and the Office of the Comptroller of the Currency (OCC) and Wachovia should prevail easily. The OCC has won deference time and again in determining when its authority to regulate national banking should preempt state law, and rightly so. Its form of regulation, which utilizes on-site examiners and catches mistakes before they hurt consumers, protects borrowers far more effectively and efficiently than states’ after-the-fact enforcement actions.
Thomas W. Merrill
Columbia University Law School
The question at issue in this case is not an easy one. There are three steps in resolving a dispute over preemption: understanding the meaning of the federal statute; understanding the state statute; and, if there is tension between them, determining whether it is sufficient to nullify the state law. In some cases, Congress speaks quite clearly as to the proper outcome, but these are the few happy cases. In most instances, it is not clear, and due to the sheer volume and indeterminacy of potential conflicts, Congress cannot resolve them all. As a result, preemption issues must be decided by the federal judiciary; by federal expert agencies; or, preferably, by a mix of the two. Agencies do possess greater expertise of their respective provenances and may even be more responsive to states through the process of proposing rules for comment. On the other hand, the federal judiciary has been responsible for developing the doctrine of preemption and is better suited to neutrally resolve disputes over state versus federal power. The federal judiciary can also check agency self-aggrandizement. For this reason, the OCC’s opinion is due weak Skidmore deference rather than strong Chevron deference, and as a result, the Supreme Court should remand this case to the Sixth Circuit.
Amy Quester
Center for Responsible Lending
As a legal matter, operating subsidiaries are treated as separate corporations from their parent companies. The OCC should thus not have jurisdiction over a state-chartered operating subsidiary such as Wachovia Mortgage. The OCC’s action here threatens to displace states’ vital role as protectors of consumers. States are far more responsive to their constituents than the federal government and are thus able to adapt to local needs and challenges more quickly and fully. They are also able to serve as laboratories for experiments in consumer protection, allowing everyone to learn which techniques are most effective. Giving excessive deference to the OCC will thus deprive consumers of their best advocates and concentrate power unreasonably in the OCC. This consumer protection is especially crucial in the area of sub-prime lending, which will be dominated by deceptive lenders in the absence of regulation because of information asymmetries. Empirical evidence has shown that state laws help sustain these markets, not damage them.
Todd Zywicki
George Mason University Law School
Federalism is a philosophy of individual liberty, not state power, although historically, it has often been confused with the latter. One of the primary reasons we have a federalist system of government is because of the founders’ profound concern for ill-advised populist crusades against interstate commerce. Michigan wants two systems of government overlapping for maximal regulation, but federalism principles actually suggest that a system of coordination will serve the cause of individual liberty best. That is just what preemption will do in this case. As a policy matter, the OCC is completely in the right. Its responsibility is to ensure that credit is adequately supplied to consumers, and it is right to see Michigan’s laws as restricting that supply. Furthermore, high-risk debtors are most hurt by the state’s overly zealous regulations, as they are the ones shut out of the market at the margins. Advocates of state regulation interpret empirical evidence to say that the reduction in loans caused by state regulations is made up entirely of bad loans, but this is patently absurd.
AEI research assistant Philip Wallach prepared this summary.
