National banks and federally chartered thrifts conducting their mortgage lending operations through subsidiaries may have to restructure their operations due to the passage of the Dodd-Frank Wall Street Reform bill.
Title X of the bill trims the preemption powers of the Office of the Comptroller of the Currency and overturns a Supreme Court ruling (Watters v. Wachovia) that extended federal preemption protection to subsidiaries of national banks.
Once the new law goes into effect (in 12 to 18 months) the subsidiaries of national banks and federally chartered thrifts will have to comply with state consumer protection and lending laws. Currently, they only have to comply with OCC and Office of Thrift Supervision regulations.
"They are not going to be able to avail themselves of federal preemption anymore. They are going to be under a new set of rules," said Lawrence Kaplan, an attorney at the Paul Hastings law firm in Washington. He believes this will prompt an "incredible number of corporate restructurings."
The Dodd-Frank bill abolishes OTS and merges the agency into OCC. Thrifts have enjoyed stronger preemption protections than national banks, but that will change with the merger.
The landmark legislation also makes it more difficult for OCC to preempt state laws and regulations, which means national banks might have to comply with some state laws and regulations.
Conference of State Banking Supervisors executive vice president John Ryan pointed out that preemption only goes to the bank and it is not clear how far preemption goes. "Banks should be considering this issue -- not just the subs of the banks," Ryan said.
