Cracking the Door to State Recovery from Federal Thrifts

In the midst of the Great Depression, Congress created the Office of Thrift Supervision (“OTS”) to oversee and regulate the federally chartered thrift industry. Congress granted the OTS the power to create regulations to examine thrifts, ensure they were sound, and to preempt state laws affecting their operations, but not the power to provide remedies to a thrift’s customers. Over the next 70 years, the courts consistently interpreted Congress’ grant of regulatory authority as plenary—preempting almost any state law that affected, even minimally, the operation of a federal thrift. The Seventh Circuit, in In re Ocwen Loan Servicing, LLC Mortgage Servicing Litigation, reinterpreted the regulations governing when a state law may incidentally affect thrift operations. More importantly, the court went further than other courts in opening the door to state regulation. While nominally applying the same precedent, the court fluidly interprets the meaning of what it means to “incidentally affect” lending operations of a federal thrift. The court’s analysis allows it to nominally follow precedent while increasing court and state oversight of federal thrifts. The court effectively cracks the door to a more active role for the states in ensuring consumers are protected and that banks are ultimately held accountable when they fail to uphold fair business ethics