A judge has told Wisconsin's regulators that they may not impose state laws on operating subsidiaries of federal thrifts.

In a ruling with potentially national implications, U.S. District Judge Barbara B. Crabb said last week that the Wisconsin Department of Financial Institutions overstepped its bounds by forcing a subsidiary of a California thrift to buy a license to sell car loans in Wisconsin.

The judge ruled that the requirement would subject WFS Financial Inc. to state regulators even though its parent company - $4.3 billion-asset Western Financial Bank of Irvine, Calif. - is already regulated by the Office of Thrift Supervision.

WFS makes auto loans to consumers and buys loans from car dealers. A lawyer for WFS said the regulatory burden, not the small cost of the license, was the main reason WFS sued Wisconsin.

"If courts elsewhere follow the lead of the Wisconsin judge, it means that companies like WFS can operate freely without having to submit to state licensing requirements," said Joseph Gabai, a Los Angeles lawyer with Morrison & Foerster. "It means being responsible to one regulator rather than 50 state regulators."

Wisconsin regulators contended that they need to regulate such lenders to protect consumers from excessive fees and exorbitant interest rates.

Department officials also claimed that thrift subsidiaries lack the rights and state regulatory exemptions as national thrifts have under the 1933 Home Owners' Loan Act. The Wisconsin department argued that the OTS exceeded its authority in 1992 when it extended the state exemptions in that federal law to thrift subsidiaries.

Judge Crabb called that premise "dubious."

"To read the defendants' brief, one might think that the scheme envisioned by the Office of Thrift Supervision is nothing but a ploy to permit corporate subsidiaries of federal savings and loan associations to bilk the public with impunity ... while giving the parent complete protection from any liability," Judge Crabb said in her written opinion.

The OTS regulates thrift subsidiaries as strongly as it regulates the thrifts themselves, said Deborah Dakin, the OTS' deputy chief counsel for regulations and legislation. Because state and federal laws can vary, she said, it makes sense to avoid duplications in regulatory authority.

Wisconsin officials said Friday that they were reviewing the ruling to determine whether to appeal.

The state had not yet calculated how many thrift subsidiaries have state finance licenses and other licenses that also might be affected, said Mark Schlei, the deputy administrator of the Department of Financial Institutions.

"This ruling applies directly to WFS, but we have to consider what it will mean for other licensees and licenses other than just the sales finance issue in this case," Mr. Schlei said.

Mr. Gabai, the attorney for WFS, said that roughly 10 of the 42 states where WFS makes auto loans regulate the subsidiary separately. He said he expects those states will back down as a result of the Wisconsin ruling.

"My hope is that the other states will read the opinion, see the handwriting on the wall, and agree with WFS' position," Mr. Gabai said. "Then they can avoid wasting taxpayers' money litigating the issue."

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