Watters v. Wachovia Bank, N. A.
The Supreme Court ruled that Michigan could not require Wachovia Bank's mortgage-lending subsidiary to register with state regulators or submit to state inspections, because federal banking law already shields the bank itself from that kind of state oversight.
The decision means that when a national bank does business through a wholly owned operating subsidiary rather than directly, the subsidiary gets the same shield from state licensing and inspection that the bank enjoys, reinforcing the federal regulator's exclusive oversight role.
How it got here: A federal district court and the Sixth Circuit both ruled for Wachovia against Michigan's regulator, who then asked the Supreme Court to review the preemption question.
The Case in Depth
What happened
Wachovia Bank, a nationally chartered bank, ran its real estate lending business through Wachovia Mortgage Corporation, a North Carolina company that was a wholly owned subsidiary licensed by federal bank regulators. Michigan law exempted banks from its mortgage-lending rules but required bank subsidiaries to register with the state and submit to its oversight. After Wachovia Mortgage became the bank's subsidiary, it dropped its Michigan registration, prompting Michigan's insurance and financial services commissioner to tell it that it could no longer lend in the state.
The question before the Court
Could a state require a national bank's mortgage-lending subsidiary to register and submit to state oversight, even though the bank itself was exempt from such state control?
Why it matters
Banks that route mortgage lending and other business through subsidiaries no longer have to register or answer to state banking regulators in every state where they operate, so long as a subsidiary does only what the parent bank itself could do. State agencies lose a supervisory and enforcement tool over those subsidiaries, leaving federal regulators as the sole overseer.
What changes now
The ruling is a final merits decision resolving the preemption dispute; the Sixth Circuit's judgment in favor of Wachovia is affirmed, and Michigan cannot enforce its registration and inspection requirements against Wachovia Mortgage. The decision also shapes how other states may regulate national bank operating subsidiaries going forward, since it establishes that such subsidiaries share the bank's exemption from state visitorial oversight. No further proceedings in this case remain; the underlying regulatory framework may still be revisited through future agency action or legislation.
What this does not decide
The Court expressed no opinion on whether a separate federal statute, the Gramm-Leach-Bliley Act, independently preempted Michigan's laws, resting its holding solely on the National Bank Act itself. It also did not decide the deference owed to the federal regulation restating this rule, since it found the underlying statute alone resolved the case.
Concurrences and dissents
Dissent — Justice Stevens
Justice Stevens argued that Congress never extended the National Bank Act's ban on state 'visitorial' oversight to bank subsidiaries, and that this omission reflected a deliberate choice, not an oversight, given Congress's history of legislating extensively about bank affiliates. He contended the majority let an administrative agency, not Congress, effectively immunize subsidiaries from state consumer-protection laws, undermining the long-standing dual banking system and the presumption against preemption.
How the Court got there
The legal reasoning, step by step
- The Court applied the settled principle that federal banking law preempts state rules whenever those rules significantly impair a national bank's exercise of powers Congress granted it, whether those powers are spelled out in the statute or merely 'incidental' to banking.
- Congress had expressly barred states from exercising 'visitorial' powers -- examination, inspection, and enforcement authority -- over national banks except as federal law allows, and had specifically authorized banks to make real estate loans subject only to federal oversight.
- The Court reasoned that national banks may conduct any activity they are otherwise allowed to do through an 'operating subsidiary,' a separate corporate entity created under state law but limited to doing only what the bank itself could do directly, and licensed and supervised by the federal bank regulator on the same terms as the bank.
- Because the Court's precedents focus on whether a state law burdens the exercise of a bank's federally granted powers rather than on the corporate form used to exercise them, the Court treated the subsidiary's mortgage lending as functionally identical to the bank's own lending for preemption purposes.
- Applying that reasoning, the Court concluded that Michigan's registration, reporting, and inspection requirements for the subsidiary would create the same kind of duplicative, multi-state burden that the visitorial-powers provision was designed to prevent, so those requirements could not be enforced against the subsidiary.
- The Court further held that a federal regulation restating this rule merely confirmed what the underlying statute already required, so no separate question about how much deference the regulation deserved needed to be resolved.
Doctrinal impact
Cases affected by this decision
Reaffirms Barnett Bank of Marion Cty., N. A. v. Nelson (517 U.S. 25)
The Court relied on this case's rule that federal bank powers ordinarily preempt state laws that significantly interfere with them.