The Texas Banking Department has scored a major victory in its legal fight to keep national banks from using a controversial branching rule to move into the state.
U.S. District Court Judge Barefoot Sanders late Wednesday overturned a decision by the Office of the Comptroller of the Currency authorizing Commercial National Bank of Texarkana, Ark., to branch into Texas while retaining branches in Arkansas.
"This is a huge victory for states' rights and state legislatures' ability to determine their branch banking policies," Texas Banking Commissioner Catherine A. Ghiglieri said in an interview Thursday.
This precedent-setting decision overturning the so-called 30-mile rule could reach beyond the borders of the Lone Star State, according to banking lawyers.
"If you are an institution thinking of using the 30-mile rule, there is reason now to hesitate - because the state will be able to block your way," said David Roderer, a partner at Winston & Strawn.
The rule, which allows a national bank to move its headquarters anywhere within a 30-mile radius, has become a popular way to get a head start on interstate branching.
Since January 1994, the agency has allowed 59 national banks to branch under the 30-mile rule. None of these banks are affected by this decision. Vulnerable banks are those that branched into Michigan and Connecticut, where the state banking departments are pursuing similar cases against the Comptroller's Office.
The Texas decision's impact on seven branching applications pending at the agency is unclear. However, OCC Chief Counsel Julie L. Williams said Thursday that the case will have limited influence. The agency is expected to appeal, but Ms. Williams said yesterday that decision has not been made.
The OCC's use of the loophole has angered a dozen other state bank regulators, who claim the agency is ignoring state laws and putting state- chartered institutions at a competitive disadvantage.
In a 43-page decision, Judge Sanders wrote that the OCC relied on "tortuous reasoning" and "specious" arguments to justify allowing Commercial National to move its headquarters from Texarkana, Ark., to Texarkana, Tex., while keeping its Arkansas main office as a branch.
The agency relied on Section 30 of the National Bank Act - the 30-mile rule - but ignored Section 36, which allows national banks to branch only to the extent that a state bank can operate branches, Judge Sanders wrote. In essence, he agreed that Commercial National had the legal standing to move its headquarters to Texas, but wrote that it may not retain the Arkansas branch.
Ms. Williams disagreed Thursday, arguing that Section 36 does not come into play when banks relocate their main offices across state lines using the 30-mile rule.
"The branching standards for national banks don't get triggered because there is nothing that says the permissibility of the branches is subject to reanalysis in light of a 30-mile relocation," she said.
The 30-mile loophole will be closed July 1, 1997, when the Riegle-Neal Interstate Banking and Branching Efficiency Act takes effect. Branching across the Texas border will be clearly illegal as of that date, because the legislature has passed a law prohibiting banks from doing so until 1999.
Commercial National established a temporary main office in Texas, pending the outcome of the lawsuit. Its president, Dennis Huffman, said the bank is asking the judge to stay his decision pending appeal. That would allow Commercial National to continue operations in Texas.