Challenging the Roots of the Subprime Mortgage Crisis : The OCC's Operating Subsidiaries Regulations and Watters v. Wachovia Bank

In 2007, the Supreme Court in Watters v. Wachovia Bank finally sided with the OCC's preemption of state consumer protection laws which had policed operating subsidiaries of national banks. In drawing this conclusion, the OCC's unchallenged interpretations of the incidental powers of the NBA - the argument that "the national bank has incidental power to conduct business through operating subsidiaries" - played a determinative role, effectively rendering those subsidiaries subject to the exclusive regulation of the OCC. However, this paper argues that the OCC's construction is contrary to law and is unreasonable given the plain language of the NBA, precedential case law and the structure of the NBA. The OCC's arguments only reflect its self-interest to be "an umbrella bank regulator" of the operating subsidiary, a state-chartered corporation. To rethink debates concerning the regulatory jurisdiction over operating subsidiaries has significant implications. Operating subsidiaries which engage in originating subprime mortgages have created serious allegations of abusive lending practices. In particular, the preemption of state laws over operating subsidiaries since 2001 has deteriorated consumer protection in the subprime mortgage market, which is, to a substantial degree, responsible for the subprime mortgage crisis. The immunization of operating subsidiaries of national banks from stringent state consumer protection laws has been used to spread the agenda of deregulation over the entire sub-prime mortgage market for the past several years