April 17 (Bloomberg) -- The U.S. Supreme Court limited the power of states to oversee financial institutions, ruling that Michigan can't regulate the mortgage-lending subsidiaries of Wachovia Corp. and other federally chartered banks.

The justices, voting 5-3 in Washington, today said banks regulated by the U.S. Office of the Comptroller of the Currency have a broad shield from additional state scrutiny. The decision comes amid calls for tighter regulation of the mortgage business because of the subprime lending crisis.

The ruling spares so-called national banks -- including Wachovia, National City Corp. and Wells Fargo & Co. -- from what they said would be a patchwork of rules around the country. Michigan laws require mortgage lenders to register with the state, pay annual fees, submit financial statements and keep records for examination purposes. At least six states, including California and Florida, have similar regulations.

``Federal control shields national banking from unduly burdensome and duplicative state regulation,'' Justice Ruth Bader Ginsburg wrote for the majority.

The case centered on the U.S. National Bank Act, which pre- empts states from regulating the activities of national banks. The issue was whether that principle applies when banks take advantage of the other legal protections they get by setting up subsidiaries.

State Regulation

An OCC regulation, backed today by the court, says subsidiaries are shielded from state oversight just like their parent companies.

``A national bank has the power to engage in real-estate lending through an operating subsidiary, subject to the same terms and conditions that govern the national bank itself,'' Ginsburg wrote. ``That power cannot be significantly impaired or impeded by state law.''

Justices Anthony Kennedy, David Souter, Stephen Breyer and Samuel Alito joined Ginsburg's opinion. Chief Justice John Roberts and Justices John Paul Stevens and Antonin Scalia dissented.

``The federal interest in protecting depositors in national banks from their subsidiaries' liabilities surely does not justify a grant of immunity from laws that apply to competitors,'' Stevens wrote. He said the OCC rule may ``drive companies seeking refuge from state regulation into the arms of federal parents.''

Justice Clarence Thomas didn't take part in the case.

Banking Victory

Banking industry representatives applauded the ruling, as did the Bush administration.

``Avoiding a patchwork of duplicative and conflicting federal and state regulation makes it easier for national banks to grant credit to customers across state lines,'' American Bankers Association President Edward Yingling said in a statement.

Comptroller of the Currency John C. Dugan said in a statement that his office ``will continue to supervise national banks and their subsidiaries to assure that their customers are treated fairly and receive the strong protections available under federal laws and regulations.''

Consumer advocates had argued that states are better equipped to protect their consumers against predatory lending and other potential abuses because they are more familiar with and accountable to their constituencies.

Congressional Action

Congressional Democrats said the ruling underscored the need for national standards to protect consumers from predatory lending. House Financial Services Chairman Barney Frank of Massachusetts said his committee in June will look at increasing the legal authority of the OCC and the Office of Thrift Supervision, which regulates savings and loans.

Those agencies ``do not now have sufficient legal power to replace the consumer laws that they've been allowed to pre-empt'' by the Supreme Court decision, Frank said.

Representative Brad Miller, a Democrat from North Carolina, said the ruling ``makes it all the more important that we adopt a national predatory lending standard.'' A 2005 proposal sponsored by Miller and Frank failed because of opposition by Republicans and the mortgage industry.

Representative Spencer Bachus of Alabama, the top Republican on the Financial Services Committee, said the ruling wouldn't hamper states in their efforts to protect consumers against predatory lending. He said states have ``plenty of tools'' at their disposal.

Lawmakers in recent months have criticized the OCC and other federal bank regulators for not doing enough to head off the spate of defaults on subprime mortgages.

Wachovia Fight

Shares of Wachovia, the country's fourth biggest bank, rose 11 cents to close at $55.17 in New York Stock Exchange composite trading. The company is based in Charlotte, North Carolina.

The case began in 2003 when Wachovia Mortgage became an operating subsidiary of Wachovia Bank. After the mortgage lender said it would comply only with federal regulations, state officials banned it from operating in Michigan, prompting Wachovia to sue.

The Cincinnati-based 6th U.S. Circuit Court of Appeals sided with Wachovia, saying the subsidiary isn't subject to state banking regulation. The Supreme Court today upheld that ruling.

The case is Watters v. Wachovia, 05-1342.

To contact the reporter on this story: Greg Stohr in Washington at gstohr@bloomberg.net.

Last Updated: April 17, 2007 17:24 EDT