The United States District Court for the Southern District of Ohio granted the Ohio Division of Financial Institution’s motion for summary judgment finding that independent mortgage brokers that solicit loans exclusively for a federal savings bank must obtain a license from the Ohio Division of Financial Institutions. State Farm Bank, F.S.B. v. Reardon, 2007 WL 2822793, Case No. C2-05-268(S.D. Ohio Oct. 1, 2007). Ohio law requires mortgage brokers to obtain a license from the state.

    State Farm Bank, a federal savings bank, proposed to market mortgages through independent State Farm Mutual insurance agents. Under the proposal, the independent agents would refer mortgage applications only to State Farm Bank, would undergo special training regarding mortgages and would be supervised by State Farm Bank. State Farm Bank presented its proposed business model for review to the Office of Thrift Supervision. The OTS chief counsel responded with a letter essentially concluding that the laws of twelve states regarding the licensing of mortgage brokers under the terms proposed by State Farm Bank were in conflict with federal regulations regarding federal savings banks. State Farm Bank sent a copy of the OTS letter to the Superintendent of the Ohio Division of Financial Institutions, advising the superintendent that the OTS had determined that state law regarding licensing of mortgage brokers was preempted as applied to exclusive agents of State Farm Bank. State Farm Bank requested a determination from the superintendent that the state licensing scheme would not apply to the exclusive agents with whom the bank intended to contract for purposes of soliciting mortgages.

    The superintendent maintained that state law had not been displaced and that the state statutes would be enforced. The present lawsuit followed, with each party seeking summary judgment.

    The court examined the preemption available to federal savings banks. The court concluded that OTS regulations do not provide a basis for finding that federal preemption extends to exclusive agents of federal savings banks. Thus, the court found that the OTS letter effected a change in the law and in the OTS’s existing policy and should not be afforded controlling weight by the court. The court concluded that neither the Supremacy Clause of the U.S. Constitution nor the federal Administrative Procedures Act permits a federal agency, through an opinion letter not subject to notice and comment, to directly preempt state law. The court held that the OTS letter stating that exclusive agents of federal savings banks need not comply with state law licensing requirements violated the Administrative Procedures Act because the letter announced a substantive rule. Therefore, the court granted the State of Ohio’s motion for summary judgment and denied State Farm Bank’s motion for summary judgment.

    • Elizabeth Anstaett and Darrell Dreher