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State Farm Bank, F.S.B. v. District of Columbia

July 28, 2009


The opinion of the court was delivered by: Emmet G. Sullivan United States District Judge


The District of Columbia requires that persons engaged in mortgage lending activities, including marketing activities, be licensed, pay annual fees, and submit to oversight by the District. Plaintiffs are State Farm Bank, a federal savings association and subsidiary of State Farm Mutual Insurance Corporation, and Jon Laskin, one of State Farm Bank's exclusive marketing agents (collectively "State Farm Bank" or "Plaintiffs"). Plaintiffs seek declaratory and injunctive relief, claiming the District's licensing and registration regulations may not be enforced against them because those local regulations are preempted by federal law. Defendants are the District of Columbia, Mayor Adrian Fenty, Commissioner of Insurance, Securities and Banking Thomas Hampton ("Commissioner"), and unnamed Doe employees enforcing the District's mortgage regulations (collectively "the District" or "Defendants"). Defendants have moved for judgment on the pleadings as to Plaintiff State Farm Bank, or in the alternative for summary judgment. Plaintiffs have moved for summary judgment and entry of a permanent injunction preventing enforcement of the District's regulations. Upon consideration of the motions, responses and replies thereto, applicable law, and the entire record, the Court DENIES Defendant's motion for judgment on pleadings, or in the alternative for summary judgment and GRANTS Plaintiffs' motion for summary judgment and entry of a permanent injunction.*fn1


A. The Parties

State Farm Bank is a federal savings association, chartered under the 1933 Home Owners' Loan Act ("HOLA"), 12 U.S.C. § 1461 et seq., and headquartered in Bloomington, Indiana. Federal savings associations are regulated by the Office of Thrift Supervision ("OTS"), a federal agency within the Treasury Department. State Farm Bank is a wholly owned subsidiary of State Farm Mutual Insurance Company. Although it is technically a savings association (or "thrift"), State Farm Bank essentially performs nationwide bank-like activities such as mortgage lending. State Farm Bank has no branches or offices open to the public, instead marketing its financial products and services via exclusive agents (independent contractors) who also sell State Farm Mutual insurance products and services. These agents provide customers with information, help customers fill out and complete loan applications, and perform other customer service activities. The agents do not evaluate loan applications or actually make the lending decisions -- that authority is in State Farm Bank itself. State Farm Bank provides training on federal laws, has a compliance program, and conducts general oversight of its exclusive agents.

The District of Columbia Mortgage Lender and Broker Act of 1996, D.C. Code §§ 26-1101-1121 (2007), requires that individuals engaged in mortgage lending activities, including marketing and advertising, be licensed and trained, pay annual fees, and submit to general oversight by the Commissioner of Insurance, Securities, and Banking. Such fees run from $1100 for an initial license to $900 for annual renewals. In addition, mortgage brokers are required to post and maintain security bonds, ranging from $25,000 to 50,000 depending on the number and dollar amount of mortgage deals over the year. These regulations expressly exempt federal savings associations, like State Farm Bank, but do not exempt its independent contractor agents.

Prior to 2004, State Farm Bank acted on a jurisdiction-by-jurisdiction basis, either having its agents conform to local regulations or not marketing via agents at all. Dissatisfied with this piecemeal approach, State Farm Bank changed strategies and sought an opinion from the OTS as to whether state regulation of its independent contractor marketing agents was preempted by federal statute and regulation. In October 2004, the OTS issued an opinion letter ("Opinion Letter") finding that state regulation over State Farm Bank's marketing agents was indeed preempted. Pls.' Mot., Exh. 2. The OTS reasoned that the HOLA and accompanying regulations dominated the field to the exclusion of state regulations. Specifically, OTS opined that because the marketing of mortgage-related products was a lawful activity under the HOLA, and because the HOLA allows third parties to act on behalf of federal savings associations, State Farm Bank may utilize its agents without state interference. Id. at 5-8. According to the Opinion Letter, such exclusive agents are only subject to federal regulation by the OTS. Id. at 8-10.

In a November 2004 letter, State Farm Bank informed the Commissioner of the Opinion Letter and stated that it would no longer proceed with applications to license its agents. In a December 2004 letter clarifying its position, State Farm Bank wrote that certain states had indicated disagreement with the Opinion Letter, and that it would obtain agents' licenses and registrations in the District under protest. In a January 4, 2005 response letter, the Commissioner stated that its legal office was reviewing the Opinion Letter and that "in the meantime it is clearly prudent for State Farm to protect its agents against enforcement actions by obtaining licenses required under state laws that may or may not be preempted by the OTS ruling." Pls.' Mot., Exh. 9. State Farm Bank filed suit on March 24, 2005.

B. Statutory and Regulatory Framework

The HOLA's general grant of authority is broad, providing that the OTS Director is authorized, under such regulations as the Director may prescribe --

(1) to provide for the organization, incorporation, examination, operation, and regulation of associations to be known as Federal savings associations (including Federal savings banks), and (2) to issue charters therefor, giving primary consideration of the best practices of thrift institutions in the United States. The lending and investment powers conferred in this section are intended to encourage such institutions to provide credit for housing safely and soundly.

12 U.S.C. § 1464(a)(1)-(2). The HOLA specifically authorizes federal savings associations to make mortgage or residential property loans. 12 U.S.C. § 1464(c)(1)(B). In regard to third party relationships, the statute states that if a federal savings association contracts out "any service authorized under this Act... (i) such performance shall be subject to regulation and examination by the Director to the same extent as if such services were being performed by the savings association on its own premises." 12 U.S.C. § 1464(d)(7)(D)(i).

The OTS itself has issued broad regulations. A regulation entitled "Federal Preemption" states that the OTS has "plenary and exclusive authority . to regulate all aspects of the operations of Federal savings associations" and that this authority is "preemptive of any state law purporting to address the subject of the operations of a Federal savings association.

12 C.F.R. § 545.2. A more specific regulation provides for "occupation of field," expressly preempting state laws imposing requirements on "licensing, registration, filings or reports by creditors," 12 C.F.R. § 560.2(b)(1), and "processing, origination, servicing, sale or purchase of, or investment or participation in, mortgages." 12 C.F.R. § 560.2(b)(10). Not preempted are state laws having to do with contracts, torts, criminal law, or "any other law that OTS, upon review, finds: (i) furthers a vital state interest; and (ii) either has only an ...

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