Michigan Court Case Is Troubling; Why All Credit Unions Should Be Aware Of It
The strength and health of the credit union movement relies in large part on the preservation of the dual chartering system. In fact, the entire American financial services system rests on the foundation of dual chartering for depository institutions: both bank and credit union. That is why a banking case out of Michigan decided by the Supreme Court this past April is so troubling.
The dual chartering system fosters innovation and efficiency in both operation and regulation in a manner which a centralized homogenized system cannot. However, a properly functioning dual chartering system requires healthy and viable state and federal charters.
Those of us on the state side of the credit union system recognized this in 1998 when we supported the Credit Union Membership Access Act (CUMAA) legislation in spite of the restrictions it sought to impose on state credit unions and the preemption of state legislative and regulatory authority. Our decision to support CUMAA was the right thing to do. That notwithstanding, in the normal course of business, preemption of state authority seriously impedes the dual chartering system.
State legislatures determine (and properly so) the appropriate authority for its state regulators and the credit unions they supervise. It is critical that state authority is protected and federal preemption is minimized so that the intra-system playing fields remain relatively level and regulatory and operational innovation can occur. In short, so the benefits of dual chartering continue to positively impact the CU system. Protecting state authority is a core principle for NASCUS. We keep a close eye on possible threats to state authority. Sometimes, as alluded to above, those threats to the dual chartering system don't directly involve the credit union movement.
One such example is the recent U.S. Supreme Court decision in the case of Watters v. Wachovia N.A. Watters is a banking preemption case that presents questions about state authority and the enforcement of state laws. A decision on this case was reached in April 2007.
Wachovia Mortgage Corp. claimed exemption from a Michigan state law governing mortgage providers in 2003. Thereafter, the Michigan regulator, the Office of Financial and Insurance Services (OFIS), notified Wachovia that without registration, it would be unable to conduct business as a mortgage lender in Michigan. Wachovia sued the Michigan agency and spent more than three years in litigation.
The Supreme Court ruled in favor of federal preemption, determining that state-chartered subsidiaries of national banks are exempt from state regulation, licensing and reporting of the states in which the subsidiary operates.
The decision may not have any immediate implications for state-chartered credit unions and state credit union regulatory authority. However, state-chartered credit union members, like their state bank customers, should have the assurance that all financial institutions, regardless of charter, comply with state consumer protection laws and regulations. To act as the majority of the Court did in the Wachovia case-to extinguish traditional state authority over state-chartered corporate entities-severely weakens the dual chartering system and un-levels the playing field between state and federally chartered institutions. And although this case concerns the banking industry, the precedent it seeks to set should be of concern to all.
Following the decision, OFIS' Commissioner Linda Watters expressed her disappointment, but emphasized the importance of vigorous consumer protection from both state and federal regulators. The rights of state legislatures to protect its consumers are critical, and NASCUS believes any erosion of state authority bears careful scrutiny and appropriate correction. The decision also raises the question of where does federal regulation end and a state's jurisdiction begin?
Another Question Raised
It is important to point out that three Supreme Court justices dissented from the majority opinion in Watters, stating that the OCC's regulation threatens the dual banking system and its principle of competitive equality. This principle is reflected in NASCUS' belief in the criticality of defending state authority and dual chartering.
The health of the credit union dual chartering system depends on preservation of the important autonomy of individual states and on cooperation among the states and the federal government. It also relies on the continued cooperation and consultation between the state and federal systems. NASCUS will continue to actively defend the preservation of state authority before the U.S. Congress and federal agencies.
Mary Martha Fortney is president of the National Association of State Credit Union Supervisors (NASCUS) and can be reached at marymartha