                   UNITED STATES DISTRICT COURT
                   FOR THE DISTRICT OF COLUMBIA
______________________________
                               )
STATE FARM BANK, F.S.B.,       )
et al.,                        )
                               )
               Plaintiffs,     )
                               )
     v.                        )    Civ. Action No. 05-611 (EGS)
                               )
DISTRICT OF COLUMBIA,          )
et al.,                        )
                               )
               Defendants.     )
______________________________)

                        MEMORANDUM OPINION

     The District of Columbia requires that persons engaged in

mortgage lending activities, including marketing activities, be

licensed, pay annual fees, and submit to oversight by the

District.   Plaintiffs are State Farm Bank, a federal savings

association and subsidiary of State Farm Mutual Insurance

Corporation, and Jon Laskin, one of State Farm Bank’s exclusive

marketing agents (collectively “State Farm Bank” or

“Plaintiffs”).   Plaintiffs seek declaratory and injunctive

relief, claiming the District’s licensing and registration

regulations may not be enforced against them because those local

regulations are preempted by federal law.    Defendants are the

District of Columbia, Mayor Adrian Fenty, Commissioner of

Insurance, Securities and Banking Thomas Hampton

(“Commissioner”), and unnamed Doe employees enforcing the

District’s mortgage regulations (collectively “the District” or

                                -1-
“Defendants”).    Defendants have moved for judgment on the

pleadings as to Plaintiff State Farm Bank, or in the alternative

for summary judgment.    Plaintiffs have moved for summary judgment

and entry of a permanent injunction preventing enforcement of the

District’s regulations.    Upon consideration of the motions,

responses and replies thereto, applicable law, and the entire

record, the Court DENIES Defendant’s motion for judgment on

pleadings, or in the alternative for summary judgment and GRANTS

Plaintiffs’ motion for summary judgment and entry of a permanent

injunction.1

I.   BACKGROUND

     A.   The Parties

     State Farm Bank is a federal savings association, chartered

under the 1933 Home Owners’ Loan Act (“HOLA”), 12 U.S.C. § 1461

et seq., and headquartered in Bloomington, Indiana.    Federal

savings associations are regulated by the Office of Thrift

Supervision (“OTS”), a federal agency within the Treasury

Department.    State Farm Bank is a wholly owned subsidiary of

State Farm Mutual Insurance Company.    Although it is technically


     1
       The Court recognizes that provisions of the Housing and
Economic Recovery Act of 2008 (the “HERA”), Pub. Law 110-289, 122
Stat. 2654, may allow the states a greater regulatory role in the
regulation of mortgage providers and marketers. However, neither
party has argued the case is moot. Although the District may
eventually pass new laws pursuant to the HERA, the dispute over
the District’s current laws and regulations is ripe for judicial
review.

                                 -2-
a savings association (or “thrift”), State Farm Bank essentially

performs nationwide bank-like activities such as mortgage

lending.   State Farm Bank has no branches or offices open to the

public, instead marketing its financial products and services via

exclusive agents (independent contractors) who also sell State

Farm Mutual insurance products and services.   These agents

provide customers with information, help customers fill out and

complete loan applications, and perform other customer service

activities.   The agents do not evaluate loan applications or

actually make the lending decisions – that authority is in State

Farm Bank itself.   State Farm Bank provides training on federal

laws, has a compliance program, and conducts general oversight of

its exclusive agents.

     The District of Columbia Mortgage Lender and Broker Act of

1996, D.C. Code §§ 26-1101-1121 (2007), requires that individuals

engaged in mortgage lending activities, including marketing and

advertising, be licensed and trained, pay annual fees, and submit

to general oversight by the Commissioner of Insurance,

Securities, and Banking.   Such fees run from $1100 for an initial

license to $900 for annual renewals.   In addition, mortgage

brokers are required to post and maintain security bonds, ranging

from $25,000 to 50,000 depending on the number and dollar amount

of mortgage deals over the year.   These regulations expressly

exempt federal savings associations, like State Farm Bank, but do


                                -3-
not exempt its independent contractor agents.

     Prior to 2004, State Farm Bank acted on a jurisdiction-by-

jurisdiction basis, either having its agents conform to local

regulations or not marketing via agents at all.    Dissatisfied

with this piecemeal approach, State Farm Bank changed strategies

and sought an opinion from the OTS as to whether state regulation

of its independent contractor marketing agents was preempted by

federal statute and regulation.     In October 2004, the OTS issued

an opinion letter (“Opinion Letter”) finding that state

regulation over State Farm Bank’s marketing agents was indeed

preempted.   Pls.’ Mot., Exh. 2.    The OTS reasoned that the HOLA

and accompanying regulations dominated the field to the exclusion

of state regulations.   Specifically, OTS opined that because the

marketing of mortgage-related products was a lawful activity

under the HOLA, and because the HOLA allows third parties to act

on behalf of federal savings associations, State Farm Bank may

utilize its agents without state interference.     Id. at 5-8.

According to the Opinion Letter, such exclusive agents are only

subject to federal regulation by the OTS.     Id. at 8-10.

     In a November 2004 letter, State Farm Bank informed the

Commissioner of the Opinion Letter and stated that it would no

longer proceed with applications to license its agents.      In a

December 2004 letter clarifying its position, State Farm Bank

wrote that certain states had indicated disagreement with the


                                   -4-
Opinion Letter, and that it would obtain agents’ licenses and

registrations in the District under protest.   In a January 4,

2005 response letter, the Commissioner stated that its legal

office was reviewing the Opinion Letter and that “in the meantime

it is clearly prudent for State Farm to protect its agents

against enforcement actions by obtaining licenses required under

state laws that may or may not be preempted by the OTS ruling.”

Pls.’ Mot., Exh. 9.   State Farm Bank filed suit on March 24,

2005.

     B.   Statutory and Regulatory Framework

     The HOLA’s general grant of authority is broad, providing

that the OTS Director

     is authorized, under such regulations as the Director
     may prescribe –

          (1) to provide for the organization,
          incorporation, examination, operation, and
          regulation of associations to be known as
          Federal savings associations (including
          Federal savings banks), and (2) to issue
          charters therefor, giving primary
          consideration of the best practices of thrift
          institutions in the United States. The
          lending and investment powers conferred in
          this section are intended to encourage such
          institutions to provide credit for housing
          safely and soundly.

12 U.S.C. § 1464(a)(1)-(2).   The HOLA specifically authorizes

federal savings associations to make mortgage or residential

property loans. 12 U.S.C. § 1464(c)(1)(B).   In regard to third

party relationships, the statute states that if a federal savings


                                -5-
association contracts out “any service authorized under this

Act... (i) such performance shall be subject to regulation and

examination by the Director to the same extent as if such

services were being performed by the savings association on its

own premises.”   12 U.S.C. § 1464(d)(7)(D)(i).

     The OTS itself has issued broad regulations.    A regulation

entitled “Federal Preemption” states that the OTS has “plenary

and exclusive authority … to regulate all aspects of the

operations of Federal savings associations” and that this

authority is “preemptive of any state law purporting to address

the subject of the operations of a Federal savings association.

12 C.F.R. § 545.2.     A more specific regulation provides for

“occupation of field,” expressly preempting state laws imposing

requirements on “licensing, registration, filings or reports by

creditors,” 12 C.F.R. § 560.2(b)(1), and “processing,

origination, servicing, sale or purchase of, or investment or

participation in, mortgages.”    12 C.F.R. § 560.2(b)(10).   Not

preempted are state laws having to do with contracts, torts,

criminal law, or “any other law that OTS, upon review, finds: (i)

furthers a vital state interest; and (ii) either has only an

incidental effect on lending operations or is not otherwise

contrary to the purposes expressed” in the statute.    12 C.F.R. §

560.2(c)(6)(i)-(ii).




                                 -6-
II.   STANDARD OF REVIEW

      Under Federal Rule of Civil Procedure 56(c), summary

judgment is appropriate if the pleadings on file, together with

the affidavits, if any, show that there is no genuine issue of

material fact and that the moving party is entitled to judgment

as a matter of law.   Fed. R. Civ. P. 56(c).   Material facts are

those that “might affect the outcome of the suit under the

governing law.”    Anderson v. Liberty Lobby, Inc., 477 U.S. 242,

248 (1986).    The party seeking summary judgment bears the initial

burden of demonstrating absence of genuine issue of material

fact.   Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986); Tao v.

Freeh, 27 F.3d 635, 638 (D.C. Cir. 1994).    In considering whether

there is a triable issue of fact, the court must draw all

reasonable inferences in favor of the non-moving party.      Tao, 27

F.3d at 638.

III. DISCUSSION

      Defendants have moved for judgment on the pleadings as to

State Farm Bank’s standing, or in the alternative for summary

judgment against preemption.    Plaintiffs have moved for summary

judgment in favor of preemption.    The parties agree that there

are no genuine issues of material fact in dispute.    Defs.’ Mot.

at 3; Pls.’ Mot. at 1.     At issue is the legal question of State

Farm Bank’s claim of preemption.    The District lays out a two-

prong attack: 1) State Farm Bank does not have standing because


                                  -7-
it has suffered no actual injury for Article III purposes and/or

because the claim is not yet ripe since the District has not yet

enforced its mortgage regulations over the agents; and 2) the

District’s regulations as to the independent contractor agents

are not preempted because the HOLA and OTS regulations only

preempt state laws as to federal savings associations themselves,

not independent contractors.

     A.    Standing

           1.    Actual Injury

     The three elements of Article III standing are injury,

causation, and redressability.     Lujan v. Defenders of Wildlife,

504 U.S. 555, 560-61 (1992).     At issue here is the injury prong,

which must be “actual,” “concrete,” and “particularized” in order

to meet the constitutional bar.     Friends of the Earth, Inc. v.

Laidlaw Envtl. Servs., Inc., 528 U.S. 167, 180-81 (2000).     For

standing purposes, the court must assume the merits in favor of

the plaintiff.    Parker v. District of Columbia, 478 F.3d 370, 377

(D.C. Cir. 2007) (citing Warth v. Seldin, 422 U.S. 490, 501-02

(1975)).   Here, that means assuming that the District’s

regulations over State Farm Bank’s agents are indeed preempted.

     The District concedes actual injury to Plaintiff agent Jon

Laskin, but argues that State Farm Bank itself suffers no injury

because its regulations exempt all federal savings associations.

Defs.’ Mot. at 24-32.   State Farm Bank, the argument goes, cannot


                                  -8-
create an Article III injury by its “voluntary” choice to use

independent contractors, who are subject to the District’s

regulations.   State Farm Bank responds that it suffers two sorts

of injury: 1) interference with its mortgage-related business

decisions; and 2) responsibility of paying agents’ licensing,

registration, and renewal fees, which can run to a few thousand

dollars per agent and more than $3 million annually nationwide.

Pls.’ Opp’n at 28-32.

     State Farm Bank has the better of the argument as either

sort of injury suffices for Article III standing.   Using

independent contractors, especially those it already has a

relationship with because of the connection to its parent State

Farm Mutual, is clearly a business opportunity, the denial or

burden of which is a sufficient constitutional injury.      See

Lepelletier v. FDIC, 164 F.3d 37, 42 (D.C. Cir. 1999).      Even more

concretely, State Farm Bank actually has to pay for the costs of

fees and exams in order to have its agents market its services.

          2.    Pre-enforcement Challenge

     The District characterizes State Farm Bank’s claim as a pre-

enforcement challenge that is not yet ripe because there has been

no credible threat that the District will actually enforce its

regulations against the marketing agents.   Circuit law on pre-

enforcement challenges requires that the complainant show it has

been “specifically targeted” or “singled out” for enforcement,


                                -9-
rather than just claiming a general threat of enforcement of the

District’s laws.   See Parker, 478 F.3d at 374-75.

     The problem with the District’s argument is that State Farm

Bank has already suffered the injuries in fact of having its

business decisions interfered with and of having to comply with,

under protest, the District’s allegedly preempted regulations.

Thus, the posture of this case is not analogous to a pre-

enforcement challenge where no actual injury has occurred.     See

id. at 376 (an actual injury independent of prospective

enforcement of the laws makes inapplicable the stringent

requirements for pre-enforcement standing).    In sum, State Farm

Bank has standing.2

     B.   Preemption

          1.    Overview of Doctrine and Recent Case Law

     The federal preemption doctrine is based on the Supremacy

Clause of the United States Constitution, which provides in

relevant part “the Laws of the United States which shall be made

in Pursuance” of the Constitution “shall be the supreme Law of

the Land.”   U.S. Const., art. VI, cl. 2.   Federal preemption may

be express, where a federal statute or regulation contains

specific language indicating preemption.    Fidelity Fed. Sav. &

Loan Ass’n v. de la Cuesta, 458 U.S. 141, 152-53 (1982).     Or,

federal preemption may be implied, where there is either “field
     2
        The District concedes standing as to Plaintiff Jon
Laskin, State Farm Bank’s representative marketing agent.

                               -10-
preemption” (pervasive scheme of federal regulations leaves no

room for states) or “conflict preemption” (compliance with

federal and state regulations is a “physical impossibility” or

where state law is an obstacle or burden to the purposes of the

federal law).   Id.

     While there is usually a presumption against preemption over

state police powers, this presumption does not apply when there

is “a history of significant federal presence” in an area.

United States v. Locke, 529 U.S. 89, 108-20 (2000).      Regulation

over banking is one such area.    Moreover, Congress has directly

regulated federal savings associations since passage of the HOLA

in 1933.   OTS’s regulatory authority has only expanded as federal

savings associations, like federal banks, have been allowed to

perform many more financial services.

     Two recent cases provide guidance on preemption analysis in

this arena.   The first is a 2007 decision by the Supreme Court

involving state laws requiring that operating subsidiaries of

federal banks, but not the federal banks themselves, register and

pay fees in order to perform mortgage-lending activities.

Watters v. Wachovia Bank, 550 U.S. 1 (2007).    The Court held that

whether the federal bank or its operating subsidiary performed

the mortgage activity, state laws as to licensing, reporting and

visitation were preempted because they would interfere with the

bank’s federally authorized business.    Id. at 13-15.    The Court


                                 -11-
found that, under the National Bank Act (“NBA”), 12 U.S.C. § 1 et

seq., federal banks were specifically authorized to engage in

real estate lending.      Id.    Moreover, federal banks were also

authorized to act through operating subsidiaries, as long as

those operating subsidiaries were subject to the same federal

regulations as the bank.        Id.   The Court provides its key

rationale in this passage: “We have never held that the

preemptive reach of the NBA extends only to a national bank

itself.   Rather, in analyzing whether state law hampers the

federally permitted activities of a national bank, we have

focused on the exercise of a national bank’s powers, not on its

corporate structure.”     Id. at 18 (emphasis in original).        In

Watters then, the Court found preemption based on the “function”

the operating subsidiaries were performing (mortgage lending),

though the Court also made note that the operating subsidiaries

were “subject to the same terms and conditions” and were

effectively under the control of the parent banks.         Id. at 20.

     The second case comes from the Sixth Circuit, and has nearly

identical facts to the case at hand.         State Farm Bank v. Reardon,

539 F.3d 336 (6th Cir. 2008).         Relying on the Opinion Letter,

State Farm Bank challenged Ohio laws requiring State Farm Bank’s

exclusive agents (the same type of independent contractor agents

here) to be registered and licensed in order to market mortgage

products.   Id. at 338.    The Sixth Circuit, relying heavily on the


                                      -12-
Supreme Court’s Watters opinion, held that Ohio’s laws were

expressly preempted even as to the independent contractor agents.

Id. at 347-48.   The court reasoned that, following Watters, the

proper preemption analysis focuses on the “the activity being

regulated rather than the actor who is being regulated.”    Id. at

345.   The court found that federal law authorized State Farm Bank

to: 1) engage in mortgage activities, including marketing and

advertising; and 2) select its own business model to efficiently

and effectively provide credit, including the utilization of

third-party contractors.   Id.   With these two factors identified,

it was a short step to conclude that Ohio could not regulate

these activities – in other words, Ohio could not regulate State

Farm Bank’s marketing of mortgage services, and because State

Farm Bank is allowed to perform the same marketing acts through

third- party agents, Ohio may not regulate those agents as well.

See also Silvas v. E*Trade Mortg. Corp., 514 F.3d 1001, 1004 (9th

Cir. 2008) (California law requiring federal savings associations

to refund mortgage “lock-in fees” field preempted based on HOLA

and OTS regulations); Flagg v. Yonkers Sav. & Loan Ass’n, FA, 396

F.3d 178-182-84 (2d Cir. 2005) (New York law requiring federal

savings association to pay interest on mortgage escrow accounts

field preempted based on HOLA and OTS regulations).




                                 -13-
            2.   The District’s Regulations Conflict with
                 Federal Law

     Following the reasoning of Watters and the nearly identical

case of Reardon, the Court rules that the District’s mortgage

regulations (i.e., registration, licensing, fees) are preempted

as applied to State Farm Bank’s exclusive independent contractor

marketing agents.    Watters was not clear as to type of

preemption, instead focusing on the “interference” and

“impairment” of the state mortgage laws over Wachovia Bank’s

operating subsidiaries.    550 U.S. at 18-19.   Reardon found

express preemption, although its reasoning sounded in conflict

preemption, citing the state law’s “significant interference”

with State Farm Bank’s business decisions and authority to

utilize independent contractor agents to markets its mortgage

products.    539 F.3d at 349.   In any event, the crucial theme of

both cases is to look to the activity being regulated, not the

actor.

     Here, any District regulations attempting to regulate the

marketing activities of State Farm Bank itself would be clearly

and expressly preempted – this is why the District exempts State

Farm Bank from its regulations.    The HOLA contemplates third-

party activity on behalf of federal savings associations, see 12

U.S.C. § 1464(d)(7)(D)(i) (OTS has authority to regulate third-

party activity on behalf of federal savings associations as if



                                 -14-
federal savings association itself was performing activity), and

the OTS allows federal savings associations to act via

independent contractors as long as OTS retains regulatory

authority.   These factors, combined with judicial precedent, lead

to the conclusion that the District may not regulate the

marketing activities of State Farm Bank’s agents – at least,

where State Farm Bank has an exclusive arrangement and

substantial control over the agents, and where those agents are

subject to OTS oversight.

     The District tries mightily to avoid preemption, but its

arguments are ultimately unavailing.    First, the District

attempts to distinguish Watters, reasoning that the operating

subsidiaries at issue in Watters are directly under the control

of the parent federal savings association, while the independent

contractors agents at issue here are, in terms of supervisory

tort liability, not under the complete control of State Farm

Bank.   Defs.’ Reply at 6-7.   The Court, like the Sixth Circuit in

Reardon, finds this a distinction without a difference as the

focus should be on the activity being regulated, not the entity

being regulated.   Reardon, 539 F.3d at 345-46.

     An additional flaw in this argument is with the District’s

premise that the issue of control is the same for purposes of

both preemption and tort liability.    On the uncontested facts

here, State Farm Bank exercises control over its agents by


                                -15-
requiring them to go through a training program and be subject to

a compliance program.   Moreover, OTS has expressly determined

that it has the authority to regulate these independent

contractor agents, concluding in its Opinion Letter that the

District’s laws are only preempted as long as State Farm has

sufficient control and as long as the agents comply with OTS

regulations.   Control in the context of preemption is not per se

control in the context of tort liability.

     The District’s next argument is that the Court should not

give Chevron deference to the Opinion Letter because it is not a

formal (i.e., notice and comment) rule-making and because it

would allow a federal agency to aggrandize its own authority by

finding preemption however and whenever it wanted.   Defs. Mot. at

20-24.   Agency interpretations of their own statutes and

regulations are usually provided strong deference.    See Auer v.

Robbins, 519 U.S. 452, 461 (1997).    Recently, however, members of

the Supreme Court have questioned whether such controlling weight

should be provided to agency determinations of preemption, since

the states are not formally represented in agency action.      See

Watters, 550 U.S. at 41 (Stevens, J., dissenting) (“when an

agency purports to decide the scope of federal preemption, a

healthy respect for state sovereignty calls for something less

than Chevron deference.”).   In Watters itself, the majority

avoided the issue by finding that the statute and regulations led


                               -16-
to preemption, rather than relying solely on the agency

interpretation.   Id. at 20-21.    This same avoidance tactic was

used by the Sixth Circuit in Reardon.     539 F.3d at 341.   As in

those cases, the Court finds it is unnecessary to decide the

level of deference owed to the Opinion Letter since an

independent review of the HOLA and OTS regulations calls for

preemption.

     The District’s last argument is that its regulations do not

really conflict with the OTS regulations because both are aimed

at consumer protection.   Defs.’ Mot. at 5.   This argument fails

because even state consumer protection laws may be subject to

preemption (the District cites no rule otherwise) and because

there is an actual conflict here since OTS has specifically

determined that the District may not regulate the mortgage-

related marketing activities of State Farm Bank’s independent

contractor agents.

III. CONCLUSION

     Defendants’ motion for judgment on the pleadings, or in the

alternative for summary judgment is DENIED.     Plaintiffs’ motion

for summary judgment and entry of a permanent injunction is

GRANTED.   Any District regulations promulgated pursuant to D.C.

Code § 26-1101 et seq. are preempted by the Home Owners’ Loan

Act, 12 U.S.C. § 1461 et seq., and regulations of by the federal

Office of Thrift Supervision as applied against Plaintiff State


                                  -17-
Farm Bank and the exclusive agents under its control and subject

to oversight by the Office of Thrift Supervision.   Defendants the

District of Columbia, Adrian M. Fenty, in his official capacity

as Mayor of the District of Columbia, Thomas E. Hampton, in his

official capacity as Commissioner of Insurance, Securities and

Banking of the District of Columbia, and their agents and/or

employees are permanently enjoined from enforcing D.C. Code § 26-

1101 et seq. and any District regulations promulgated thereto

seeking to regulate the banking-related activities, including

mortgage and marketing services, against Plaintiff State Farm

Bank and the exclusive agents under its control and subject to

oversight by the Office of Thrift Supervision.   An appropriate

Order accompanies this Memorandum Opinion.


Signed:   Emmet G. Sullivan
          United States District Judge
          July 28, 2009




                              -18-
