WASHINGTON—Supreme Court justices sparred Wednesday over a bid by Wachovia Bank to avoid state regulators in its mortgage lending business.
Some of the justices' questions turned on technical banking issues, but the lively exchanges broadened at times to address the constitutional and legal balance between federal and state powers.
The high court heard arguments in a lawsuit the state of Michigan filed after Wachovia Mortgage Corp. was formed in January 2003 as an operating subsidiary of the Charlotte, N.C.-based bank.
Michigan sued Wachovia over the company's assertion that its mortgage subsidiaries no longer needed licenses or registrations from Michigan or other states in order to provide home loans.
Two lower courts have upheld Wachovia's claim that only federal regulators have the power to oversee its operating subsidiaries through the U.S. Office of the Comptroller of the Currency, the U.S. government agency charged with monitoring national banks.
All of the states and the District of Columbia have filed or signed briefs supporting the Michigan position; the state of Connecticut has filed a similar lawsuit against Wachovia.
Consumer groups have followed the case closely, saying states have targeted deceptive mortgage firms more aggressively than the federal government. Bush administration allies who support tort reform are also eyeing the case as an opportunity for the Supreme Court to signal whether it believes there are too many lawsuits.
"Michigan and other states want to be able to help protect their citizens against abusive and predatory lending practices," John Blanchard, assistant attorney general of Michigan, told the justices.
Robert Long, a Washington lawyer representing Wachovia, said all of the bank's operations, including its home loans, get extensive federal oversight. He rejected a suggestion by Justice John Roberts that Wachovia is seeking a competitive advantage over other mortgage lenders subject to state regulation.
"This is not a sort of special privilege," Long said.
Van Beck, assistant general counsel of Wachovia, said after the hearing that 30 or more comptroller office examiners regulate the bank's operations every day from oversight offices at its Charlotte headquarters.
"We are seeking to stay away from a patchwork of state regulations," Beck said.
Wachovia, originally founded in 1879, acquired First Union in 2001 to become the country's fourth-largest bank. It has branches in 21 states; Wachovia Mortgage Corp. makes home loans in 39 states.
At issue in the Michigan-Wachovia lawsuit is whether Congress, in the National Bank Act, intended that federal laws supersede state regulations—a legal term called "pre-emption"—in the oversight of banks' operating subsidiaries, as well as the banks themselves.
Justices Anthony Kennedy, David Souter and Stephen Breyer seemed most receptive to Wachovia's arguments, while Justices Roberts, John Paul Stevens and Ruth Bader Ginsburg appeared to lean toward Michigan's claims. Justice Antonin Scalia grilled both sides relentlessly. Justice Clarence Thomas had recused himself from the case and didn't participate.
While justices' questions don't always predict their eventual rulings, several appeared to tip their hands in the Wachovia case.
"This is just a standard (federal) pre-emption case," Kennedy said in apparent agreement with the bank.
Roberts, though, pointedly asked Long whether the bank, by turning its mortgage lenders into operating subsidiaries, was seeking to take advantage of state laws in some cases while avoiding other state regulations it doesn't like.
"You really are trying to have your cake and eat it too," Roberts said. "You want to be able to operate through a subsidiary and yet not be subject to the same rules (as other companies)."
After the hearing, both sides expressed satisfaction.
"We're very optimistic that the court will see that the states have not been pre-empted from protecting their citizens against predatory and abusive lending operations," said Blanchard, the Michigan assistant attorney general.
Beck, Wachovia's No. 2 lawyer, said, "We believe that our counsel made strong legal arguments in support of our position. We are looking forward to the outcome and to the high court's opinion in the case."
Before the hearing Wednesday, some legal experts predicted that Wachovia will prevail before the Supreme Court.
"The Supreme Court routinely and almost universally has recognized the pre-emptive power of federal banking law over state banking law," said Brian Brooks, a Washington lawyer who has represented banks in other suits.
Thomas Merrill, a professor at Columbia University Law School, said the Wachovia-Michigan dispute is part of a broader historical struggle.
"This is really the frontlines of an evolutionary, ongoing struggle for power between the federal government and the states," Merrill said.
Amy Quester, a lawyer with the Center for Responsible Lending, one of numerous consumer groups that are supporting Michigan in the lawsuit, said states have filed hundreds of lawsuits against predatory mortgage lenders, while the federal regulator rarely files suit.
"States have played a historic role in protecting consumers," Quester said.
(c) 2006, McClatchy-Tribune Information Services.
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