UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLUMBIA ______________________________ ) STATE FARM BANK, F.S.B., ) et al., ) ) Plaintiffs, ) ) v. ) Civ. Action No. 05-611 (EGS) ) DISTRICT OF COLUMBIA, ) et al., ) ) Defendants. ) ______________________________)
MEMORANDUM OPINION
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
-1- “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.1
I. BACKGROUND
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
1 The Court recognizes that provisions of the Housing and Economic Recovery Act of 2008 (the “HERA”), Pub. Law 110-289, 122 Stat. 2654, may allow the states a greater regulatory role in the regulation of mortgage providers and marketers. However, neither party has argued the case is moot. Although the District may eventually pass new laws pursuant to the HERA, the dispute over the District’s current laws and regulations is ripe for judicial review.
-2- 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
-3- 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
-4- 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
-5- 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
incidental effect on lending operations or is not otherwise
contrary to the purposes expressed” in the statute. 12 C.F.R. §
560.2(c)(6)(i)-(ii).
-6- II. STANDARD OF REVIEW
Under Federal Rule of Civil Procedure 56(c), summary
judgment is appropriate if the pleadings on file, together with
the affidavits, if any, show that there is no genuine issue of
material fact and that the moving party is entitled to judgment
as a matter of law. Fed. R. Civ. P. 56(c). Material facts are
those that “might affect the outcome of the suit under the
governing law.” Anderson v. Liberty Lobby, Inc., 477 U.S. 242,
248 (1986). The party seeking summary judgment bears the initial
burden of demonstrating absence of genuine issue of material
fact. Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986); Tao v.
Freeh, 27 F.3d 635, 638 (D.C. Cir. 1994). In considering whether
there is a triable issue of fact, the court must draw all
reasonable inferences in favor of the non-moving party. Tao, 27
F.3d at 638.
III. DISCUSSION
Defendants have moved for judgment on the pleadings as to
State Farm Bank’s standing, or in the alternative for summary
judgment against preemption. Plaintiffs have moved for summary
judgment in favor of preemption. The parties agree that there
are no genuine issues of material fact in dispute. Defs.’ Mot.
at 3; Pls.’ Mot. at 1. At issue is the legal question of State
Farm Bank’s claim of preemption. The District lays out a two-
prong attack: 1) State Farm Bank does not have standing because
-7- it has suffered no actual injury for Article III purposes and/or
because the claim is not yet ripe since the District has not yet
enforced its mortgage regulations over the agents; and 2) the
District’s regulations as to the independent contractor agents
are not preempted because the HOLA and OTS regulations only
preempt state laws as to federal savings associations themselves,
not independent contractors.
A. Standing
1. Actual Injury
The three elements of Article III standing are injury,
causation, and redressability. Lujan v. Defenders of Wildlife,
504 U.S. 555, 560-61 (1992). At issue here is the injury prong,
which must be “actual,” “concrete,” and “particularized” in order
to meet the constitutional bar. Friends of the Earth, Inc. v.
Laidlaw Envtl. Servs., Inc., 528 U.S. 167, 180-81 (2000). For
standing purposes, the court must assume the merits in favor of
the plaintiff. Parker v. District of Columbia, 478 F.3d 370, 377
(D.C. Cir. 2007) (citing Warth v. Seldin, 422 U.S. 490, 501-02
(1975)). Here, that means assuming that the District’s
regulations over State Farm Bank’s agents are indeed preempted.
The District concedes actual injury to Plaintiff agent Jon
Laskin, but argues that State Farm Bank itself suffers no injury
because its regulations exempt all federal savings associations.
Defs.’ Mot. at 24-32. State Farm Bank, the argument goes, cannot
-8- create an Article III injury by its “voluntary” choice to use
independent contractors, who are subject to the District’s
regulations. State Farm Bank responds that it suffers two sorts
of injury: 1) interference with its mortgage-related business
decisions; and 2) responsibility of paying agents’ licensing,
registration, and renewal fees, which can run to a few thousand
dollars per agent and more than $3 million annually nationwide.
Pls.’ Opp’n at 28-32.
State Farm Bank has the better of the argument as either
sort of injury suffices for Article III standing. Using
independent contractors, especially those it already has a
relationship with because of the connection to its parent State
Farm Mutual, is clearly a business opportunity, the denial or
burden of which is a sufficient constitutional injury. See
Lepelletier v. FDIC, 164 F.3d 37, 42 (D.C. Cir. 1999). Even more
concretely, State Farm Bank actually has to pay for the costs of
fees and exams in order to have its agents market its services.
2. Pre-enforcement Challenge
The District characterizes State Farm Bank’s claim as a pre-
enforcement challenge that is not yet ripe because there has been
no credible threat that the District will actually enforce its
regulations against the marketing agents. Circuit law on pre-
enforcement challenges requires that the complainant show it has
been “specifically targeted” or “singled out” for enforcement,
-9- rather than just claiming a general threat of enforcement of the
District’s laws. See Parker, 478 F.3d at 374-75.
The problem with the District’s argument is that State Farm
Bank has already suffered the injuries in fact of having its
business decisions interfered with and of having to comply with,
under protest, the District’s allegedly preempted regulations.
Thus, the posture of this case is not analogous to a pre-
enforcement challenge where no actual injury has occurred. See
id. at 376 (an actual injury independent of prospective
enforcement of the laws makes inapplicable the stringent
requirements for pre-enforcement standing). In sum, State Farm
Bank has standing.2
B. Preemption
1. Overview of Doctrine and Recent Case Law
The federal preemption doctrine is based on the Supremacy
Clause of the United States Constitution, which provides in
relevant part “the Laws of the United States which shall be made
in Pursuance” of the Constitution “shall be the supreme Law of
the Land.” U.S. Const., art. VI, cl. 2. Federal preemption may
be express, where a federal statute or regulation contains
specific language indicating preemption. Fidelity Fed. Sav. &
Loan Ass’n v. de la Cuesta, 458 U.S. 141, 152-53 (1982). Or,
federal preemption may be implied, where there is either “field 2 The District concedes standing as to Plaintiff Jon Laskin, State Farm Bank’s representative marketing agent.
-10- preemption” (pervasive scheme of federal regulations leaves no
room for states) or “conflict preemption” (compliance with
federal and state regulations is a “physical impossibility” or
where state law is an obstacle or burden to the purposes of the
federal law). Id.
While there is usually a presumption against preemption over
state police powers, this presumption does not apply when there
is “a history of significant federal presence” in an area.
United States v. Locke, 529 U.S. 89, 108-20 (2000). Regulation
over banking is one such area. Moreover, Congress has directly
regulated federal savings associations since passage of the HOLA
in 1933. OTS’s regulatory authority has only expanded as federal
savings associations, like federal banks, have been allowed to
perform many more financial services.
Two recent cases provide guidance on preemption analysis in
this arena. The first is a 2007 decision by the Supreme Court
involving state laws requiring that operating subsidiaries of
federal banks, but not the federal banks themselves, register and
pay fees in order to perform mortgage-lending activities.
Watters v. Wachovia Bank, 550 U.S. 1 (2007). The Court held that
whether the federal bank or its operating subsidiary performed
the mortgage activity, state laws as to licensing, reporting and
visitation were preempted because they would interfere with the
bank’s federally authorized business. Id. at 13-15. The Court
-11- found that, under the National Bank Act (“NBA”), 12 U.S.C. § 1 et
seq., federal banks were specifically authorized to engage in
real estate lending. Id. Moreover, federal banks were also
authorized to act through operating subsidiaries, as long as
those operating subsidiaries were subject to the same federal
regulations as the bank. Id. The Court provides its key
rationale in this passage: “We have never held that the
preemptive reach of the NBA extends only to a national bank
itself. Rather, in analyzing whether state law hampers the
federally permitted activities of a national bank, we have
focused on the exercise of a national bank’s powers, not on its
corporate structure.” Id. at 18 (emphasis in original). In
Watters then, the Court found preemption based on the “function”
the operating subsidiaries were performing (mortgage lending),
though the Court also made note that the operating subsidiaries
were “subject to the same terms and conditions” and were
effectively under the control of the parent banks. Id. at 20.
The second case comes from the Sixth Circuit, and has nearly
identical facts to the case at hand. State Farm Bank v. Reardon,
539 F.3d 336 (6th Cir. 2008). Relying on the Opinion Letter,
State Farm Bank challenged Ohio laws requiring State Farm Bank’s
exclusive agents (the same type of independent contractor agents
here) to be registered and licensed in order to market mortgage
products. Id. at 338. The Sixth Circuit, relying heavily on the
-12- Supreme Court’s Watters opinion, held that Ohio’s laws were
expressly preempted even as to the independent contractor agents.
Id. at 347-48. The court reasoned that, following Watters, the
proper preemption analysis focuses on the “the activity being
regulated rather than the actor who is being regulated.” Id. at
345. The court found that federal law authorized State Farm Bank
to: 1) engage in mortgage activities, including marketing and
advertising; and 2) select its own business model to efficiently
and effectively provide credit, including the utilization of
third-party contractors. Id. With these two factors identified,
it was a short step to conclude that Ohio could not regulate
these activities – in other words, Ohio could not regulate State
Farm Bank’s marketing of mortgage services, and because State
Farm Bank is allowed to perform the same marketing acts through
third- party agents, Ohio may not regulate those agents as well.
See also Silvas v. E*Trade Mortg. Corp., 514 F.3d 1001, 1004 (9th
Cir. 2008) (California law requiring federal savings associations
to refund mortgage “lock-in fees” field preempted based on HOLA
and OTS regulations); Flagg v. Yonkers Sav. & Loan Ass’n, FA, 396
F.3d 178-182-84 (2d Cir. 2005) (New York law requiring federal
savings association to pay interest on mortgage escrow accounts
field preempted based on HOLA and OTS regulations).
-13- 2. The District’s Regulations Conflict with Federal Law
Following the reasoning of Watters and the nearly identical
case of Reardon, the Court rules that the District’s mortgage
regulations (i.e., registration, licensing, fees) are preempted
as applied to State Farm Bank’s exclusive independent contractor
marketing agents. Watters was not clear as to type of
preemption, instead focusing on the “interference” and
“impairment” of the state mortgage laws over Wachovia Bank’s
operating subsidiaries. 550 U.S. at 18-19. Reardon found
express preemption, although its reasoning sounded in conflict
preemption, citing the state law’s “significant interference”
with State Farm Bank’s business decisions and authority to
utilize independent contractor agents to markets its mortgage
products. 539 F.3d at 349. In any event, the crucial theme of
both cases is to look to the activity being regulated, not the
actor.
Here, any District regulations attempting to regulate the
marketing activities of State Farm Bank itself would be clearly
and expressly preempted – this is why the District exempts State
Farm Bank from its regulations. The HOLA contemplates third-
party activity on behalf of federal savings associations, see 12
U.S.C. § 1464(d)(7)(D)(i) (OTS has authority to regulate third-
party activity on behalf of federal savings associations as if
-14- federal savings association itself was performing activity), and
the OTS allows federal savings associations to act via
independent contractors as long as OTS retains regulatory
authority. These factors, combined with judicial precedent, lead
to the conclusion that the District may not regulate the
marketing activities of State Farm Bank’s agents – at least,
where State Farm Bank has an exclusive arrangement and
substantial control over the agents, and where those agents are
subject to OTS oversight.
The District tries mightily to avoid preemption, but its
arguments are ultimately unavailing. First, the District
attempts to distinguish Watters, reasoning that the operating
subsidiaries at issue in Watters are directly under the control
of the parent federal savings association, while the independent
contractors agents at issue here are, in terms of supervisory
tort liability, not under the complete control of State Farm
Bank. Defs.’ Reply at 6-7. The Court, like the Sixth Circuit in
Reardon, finds this a distinction without a difference as the
focus should be on the activity being regulated, not the entity
being regulated. Reardon, 539 F.3d at 345-46.
An additional flaw in this argument is with the District’s
premise that the issue of control is the same for purposes of
both preemption and tort liability. On the uncontested facts
here, State Farm Bank exercises control over its agents by
-15- requiring them to go through a training program and be subject to
a compliance program. Moreover, OTS has expressly determined
that it has the authority to regulate these independent
contractor agents, concluding in its Opinion Letter that the
District’s laws are only preempted as long as State Farm has
sufficient control and as long as the agents comply with OTS
regulations. Control in the context of preemption is not per se
control in the context of tort liability.
The District’s next argument is that the Court should not
give Chevron deference to the Opinion Letter because it is not a
formal (i.e., notice and comment) rule-making and because it
would allow a federal agency to aggrandize its own authority by
finding preemption however and whenever it wanted. Defs. Mot. at
20-24. Agency interpretations of their own statutes and
regulations are usually provided strong deference. See Auer v.
Robbins, 519 U.S. 452, 461 (1997). Recently, however, members of
the Supreme Court have questioned whether such controlling weight
should be provided to agency determinations of preemption, since
the states are not formally represented in agency action. See
Watters, 550 U.S. at 41 (Stevens, J., dissenting) (“when an
agency purports to decide the scope of federal preemption, a
healthy respect for state sovereignty calls for something less
than Chevron deference.”). In Watters itself, the majority
avoided the issue by finding that the statute and regulations led
-16- to preemption, rather than relying solely on the agency
interpretation. Id. at 20-21. This same avoidance tactic was
used by the Sixth Circuit in Reardon. 539 F.3d at 341. As in
those cases, the Court finds it is unnecessary to decide the
level of deference owed to the Opinion Letter since an
independent review of the HOLA and OTS regulations calls for
preemption.
The District’s last argument is that its regulations do not
really conflict with the OTS regulations because both are aimed
at consumer protection. Defs.’ Mot. at 5. This argument fails
because even state consumer protection laws may be subject to
preemption (the District cites no rule otherwise) and because
there is an actual conflict here since OTS has specifically
determined that the District may not regulate the mortgage-
related marketing activities of State Farm Bank’s independent
contractor agents.
III. CONCLUSION
Defendants’ motion for judgment on the pleadings, or in the
alternative for summary judgment is DENIED. Plaintiffs’ motion
for summary judgment and entry of a permanent injunction is
GRANTED. Any District regulations promulgated pursuant to D.C.
Code § 26-1101 et seq. are preempted by the Home Owners’ Loan
Act, 12 U.S.C. § 1461 et seq., and regulations of by the federal
Office of Thrift Supervision as applied against Plaintiff State
-17- Farm Bank and the exclusive agents under its control and subject
to oversight by the Office of Thrift Supervision. Defendants the
District of Columbia, Adrian M. Fenty, in his official capacity
as Mayor of the District of Columbia, Thomas E. Hampton, in his
official capacity as Commissioner of Insurance, Securities and
Banking of the District of Columbia, and their agents and/or
employees are permanently enjoined from enforcing D.C. Code § 26-
1101 et seq. and any District regulations promulgated thereto
seeking to regulate the banking-related activities, including
mortgage and marketing services, against Plaintiff State Farm
Bank and the exclusive agents under its control and subject to
oversight by the Office of Thrift Supervision. An appropriate
Order accompanies this Memorandum Opinion.
Signed: Emmet G. Sullivan United States District Judge July 28, 2009
-18-