Key test of state power for Supreme Court

For 11 years, the conservative wing of the US Supreme Court did something decidedly unconservative. It sought to tip the balance of power between the national government and the states.

This so-called federalism revolution was aimed at bolstering the status of the states as dual sovereigns in the face of an ever-expanding sphere of federal power. The justices wrote of state sovereignty and the dignity of the states in terms reminiscent of Colonial distrust of the kind of draconian central authority wielded by the British crown.

But by the time Chief Justice William Rehnquist died in 2005, the "revolution" resembled little more than a constitutional skirmish.

Now with two new members of the Supreme Court, it is unclear whether the justices might again take up the mantle of states' rights. Will a majority seek to boldly build on the string of federalism precedents handed down by the Rehnquist court, or will the judicial minimalism of Chief Justice John Roberts leave it to federal regulatory agencies and Congress to police the constitutional contours of federal-state power?

The high court's first significant opportunity to address those questions arrives in a case set for oral argument Wednesday.

At issue in Watters v. Wachovia Bank is whether a federal agency has the power to preempt state regulations governing national mortgage companies doing business within a state's borders. Put another way, the issue is who regulates mortgage companies affiliated with national banks, state regulators or federal regulators.

Traditionally, mortgage companies had to comply with state registration and other requirements. But in 2001, the federal Office of the Comptroller of the Currency (OCC), which regulates national banks, issued a new rule that subsidiary companies of national banks are governed by federal, not state, regulations.

That action preempted state laws and rules governing mortgage companies and other national bank subsidiaries operating in a particular state.

The current case arose in Michigan. Wachovia Mortgage Corp., a subsidiary of Wachovia Bank, had long done business there. The mortgage company was set up as a Michigan corporation. But because it is a subsidiary of a national bank, company officials said after the OCC rule change that they did not have to comply with Michigan regulations, only federal ones enforced by the OCC.

Linda Watters, who heads Michigan's Office of Insurance and Financial Services, insisted that the company would have to comply with state laws if it wanted to continue to conduct business there.

The dispute went to court. A federal judge and a federal appeals court panel ruled for the company. Two other federal appeals courts have also ruled against state governments in similar litigation.

Michigan is now asking the Supreme Court to reverse the lower court decision, in part, according to state lawyers, because the OCC's preemptive actions encroach on an area of traditional state power enforced by principles of federalism guaranteed in the 10th Amendment.

"In the absence of Congressional authorization, the OCC has no independent power to preempt the validly enacted legislation of a sovereign state," writes Michigan Solicitor General Thomas Casey in his brief to the court.

Lawyers for Wachovia disagree. "These rules are within the OCC's delegated rulemaking authority," says Robert Long in his brief. Any protections of state power under the 10th Amendment are abrogated by Congress's constitutional power under the commerce clause to regulate national banking, Mr. Long adds.

The Bush administration is backing Wachovia and the OCC. Federal agencies have the power to issue regulations that preempt state laws even when Congress has not specifically authorized such preemption, says Solicitor General Paul Clement in his brief.

The case is being closely followed by bankers as well as other nationwide businesses that face a patchwork quilt of differing state regulations. Federal preemption offers a significantly more efficient means of conducting business nationwide.

"For some of us, we're not even sure how the 10th Amendment ended up in this case," says Robin Conrad of the National Chamber Litigation Center of the US Chamber of Commerce. "We have two new members of the court, and they have yet to show their cards in cases involving federal preemption," she says. "We see this as a pretty clear case that uniform national law is of primary importance."

Also watching the case are attorneys general from the nation's 49 other states, the District of Columbia, and Puerto Rico, who are urging the justices to uphold Michigan's power to regulate companies doing business within its own borders.

"If [the OCC rule] is allowed to stand, it would render states powerless to protect their residents from abusive and discriminatory consumer practices by state- created entities that are operating subsidiaries of national banks," writes Caitlin Halligan, New York solicitor general, in a friend-of-the-court brief filed by the states.

Consumer protection is an area traditionally regulated by the states, Mr. Casey writes in the Michigan brief. In contrast, he says, the primary mission of the OCC is to ensure the safety and soundness of the national banking system.

There are 40 full-time OCC staff members in a central office to investigate consumer complaints against national banks and their subsidiaries, Casey says. By contrast, there are nearly 700 full-time examiners and lawyers at the state level who handle consumer complaints, he says.

Lawyers for National City Bank offer different numbers in their friend-of-the-court brief. Of OCC's 1,800 examiners, they say, 300 spend all or part of their time enforcing bank compliance with consumer-protection laws.

The OCC receives 70,000 consumer complaints a year, the National City Bank brief says, and in 2004 returned $4 million in wrongful fees and charges to complaining customers.

The brief says that state and local consumer-protection efforts "provide no real benefit to consumers." It adds that federal examiners located on-site in large national banks effectively monitor not only the financial soundness of the bank's operations but also compliance with federal consumer-protection laws.