Federal Preemption of State LawsNo discussion of state lending laws is complete without an examination of federal preemption of state laws. While at first blush it may appear that the federal government has tied the hands of the states to address predatory lending, there is still much states can do to regulate abusive mortgage loans. Traditionally, credit laws including limits on interest rates, points, fees and loan terms were controlled by state law, except for federally chartered institutions. Beginning in 1980, Congress began preempting certain state lending laws in an attempt to make more mortgage money available for home borrowers.
111 Federal preemption is authorized by at least eight different statutes. Whether federal preemption applies to a particular loan depends largely upon the type of lender and/or the type of loan.
112 For the purposes of this report, we provide a brief overview of the statutes that have the greatest impact on a state’s ability to address predatory lending and identify areas were states can act to reduce predatory lending. It is important to note that recent surveys in Ohio and Tennessee have found that a large percentage of subprime lenders do not meet federal preemption requirements, so are governed by state predatory lending laws.
113 Preemption for Federally Chartered Institutions The National Bank Act (“NBA”) allows a national bank to charge either the maximum rate allowed under state law or an alternative federal rate. In 2004, the Office of the Comptroller of the Currency adopted regulations that claim broad preemption of state laws as to national banks. Basically, the regulations preempt all state laws unless the law is only “incidental” to the banking industry.
114 The preemption only applies to national banks and their operating subsidiaries for credit that is initiated by the bank or subsidiary – not to loans assigned to it.
115 Preemption does not apply to state unfair and deceptive practices acts, the uniform commercial code or state anti-discrimination laws.
116 Unfortunately, the OCC has largely preempted state and local regulators from enforcing those state laws that do apply to national banks.
117 The Home Owners’ Loan Act (“HOLA”) is similar to the NBA, but applies to federal savings associations.
118 The Office of Thrift Supervision (OTS), which regulates federal thrifts, has interpreted HOLA as preempting all state laws regulating savings associations.
119 OTS has specifically found that state UDAP statutes are not preempted. In a small victory for homeowners, the Maryland Court of Appeals found that when a federal savings association stated in its contract that the loan was made under Maryland law, the state law was not preempted.
120 The National Housing Act preempts state laws for FHA and VA Insured loans.
121 The Federal Credit Union Act of 1934 governs federal credit unions and is similar to the NBA and HOLA, however, its preemption of state law is narrower.
122 State laws that do not limit rates, terms of repayment and certain other conditions are not preempted.
123 Preemption for Federally Insured State Chartered Banks In 1980, Congress extended the “most favored lender” status granted to national banks to state chartered banks.
124 This action allows state chartered banks to charge the same interest rates as national banks, effectively preempting state interest rate caps. States are still permitted to regulate most substantive provisions of loans made by state chartered banks.
125 Preemption for Federally Related First Mortgage Loans The Depository Institutions and Monetary Control Act (“DIDMCA”)
126 preempts state usury ceilings on any “federally related” mortgage loan secured by a first lien on residential real property. Because of the broad definition of a federally related loan, virtually all first mortgages are covered, but the scope of preemption is limited. DIDMCA preempts state limits on interest rates, points, finance charges or “other charges.” DIDMCA applies to purchase money loans and refinanced loans. Some commentators believe that DIDMCA has added to the predatory lending problem by requiring borrowers to refinance existing mortgages in order for the lender to have first lien status and preempt state limits on interest rates.
127 Preemption for Alternative Mortgage Transactions Another statute that has a significant impact on the mortgage market is the Alternative Mortgage Transaction Parity Act (“AMTPA”).
128 AMTPA, which became effective in 1982, extends federal regulations which previously applied only to federally-chartered lenders to all “housing creditors” that make “alternative mortgage transactions.”
129 AMTPA was intended to allow “creative” financing for mortgage loans by preempting state laws limiting variable interest rates, balloon payments and negative amortization.
130 AMTPA does not limit interest rates on mortgages, but instead it deals with the “structure” of mortgage loans.
131 AMTPA only applies to “alternative mortgage transactions,” which are generally defined as loans that contain adjustable rates, balloon payments or negative amortization.
132 Commentators point to AMTPA as contributing to the dramatic increase in predatory lending since the early 1980’s.
133 Because of the abuse that occurred after the passage of AMPTA, in 1994, Congress reregulated to a limited extent high cost loans when it enacted HOEPA. (See discussion of HOEPA at p. 9) If a loan is covered by HOEPA, its provisions and not those of AMTPA will control.
134 In addition, as of 2003, the Office of Thrift Supervision (OTS) removed prepayment penalties and late fees from those items that were preempted under AMTPA, thus allowing states to regulate these items for lenders who are not federally chartered.
135 State Action in the Wake of Federal Preemption While federal preemption is broader than many commentators believe is proper, it does not completely limit a state’s ability to address predatory lending within its borders.
136 States are largely prohibited from regulating national banks and federally chartered savings associations and credit unions, and their operating subsidiaries, most subprime lenders do not fall into this category. State limits on interest rates, points and fees on first mortgages are largely preempted by DIDMCA, however, this preemption does not apply to junior liens and does not preempt state laws addressing other loan terms and conditions. Also, DIDMCA does not apply to some small lenders, home improvement contractors or brokers.
137 While AMTPA applies broadly to all “housing creditors,” and gives the creditor the option to follow federal regulations instead of state law, its provisions only apply to “alternative mortgage products” and it does not preempt state limits on prepayment penalties or late fees.
138 In addition, state unfair and deceptive practices laws are generally not preempted by federal law, allowing actions against lenders for fraudulent and deceptive conduct. A large percentage of subprime loans are originated by non-bank lenders or mortgage brokers.
139 Most of the leading subprime lenders are mortgage companies and finance companies.
140 For many of these transactions, states can regulate various terms and conditions of the loans and can place restrictions on the abusive predatory practices described above. In addition, a recent study has found that state predatory lending laws have been effective in reducing predatory lending, particularly in those states with strong laws.
141 The findings of the study support decisive state action to address predatory lending in order to protect homeowners, in spite of preemption.
Bankers Law Blog
The FDIC and Premption of state Laws.
Watters vs. Wachovia
This is an important and very poor development. As I have stated elsewhere in this web site, we need a minimum standard for Federal protections that does not prempt state laws.
This is a great web site. Lots of good information.
http://www.banklawyersblog.com/3_bank_lawyers/2007/05/fdic_preemption.html
PREEMPTION – MARYLAND FINDER’S FEE LAW Not Preemted by (DIDMCA) FEDERAL DEPOSITORY INSTITUTIONS DEREGULATION AND MONETARY CONTROL ACT
MORTGAGE BROKERS ARE NOT “CREDITORS” UNDER THE DIDMCA -
MARYLAND FINDER’S FEE LAW NOT PREEMPTED UNDER THE DIDMCA
Facts: This case involves the asserted express preemption of the Maryland Finder's Fee Law, Md. Code (1975, 2000 Repl. Vol.), §§ 12-801 - 12-809 of the Commercial Law Article, by 12 U.S.C. § 1735f-7a, the Federal Depository Institutions Deregulation and Monetary Control Act. Sweeney alleged in the Circuit Court for Frederick County that her mortgage broker, Savings First, extracted a $10,788 mortgage broker's fee for the second of two mortgage loans made within a twenty-four month period, in contravention of the eight percent statutory limitation provided by § 12-804 (b) of the Commercial Law Article. The $10,788 mortgage broker's fee was calculated using the total amount of the second refinance loan ($158,400), rather than on the difference between the earlier loan amount and the second loan amount ($18,150). § 12-804 (c). Savings First moved for dismissal or summary judgment because § 1735f-7a (a)(1) of the United States Code expressly preempted any state from “expressly limiting the rate or amount of interest, discount points, finance charges, or other charges” on qualifying mortgages. The Circuit Court granted the motion for summary judgment. Sweeney appealed to the Court of Special Appeals. The Court of Appeals granted a writ of certiorari before the intermediate appellate court could decide the case. Held: Judgment reversed. The express preemption provision of § 1735f-7a(a)(1) applies expressly to a loan or mortgage that meets three requirements: 1) be secured by a first lien on residential real property; 2) be made after 31 March 1980; 3) and be a “federally related mortgage loan” as defined by the National Housing Act (NHA). The express preemption provision of DIDMCA is ambiguous as to whether the preemption applies to all of the parties involved in an otherwise covered mortgage transaction or merely the mortgage itself (and by logical extension, the creditor only). The legislative history of DIDMCA provides that state interest rate-cap laws, which could force a home mortgage creditor to loan money to homebuyers below the market levels, had contributed to a "severe" mortgage credit crunch. S. Rep. No. 96-368, at 18 (1980); reprinted in 1980 U.S.C.C.A.N. 236, 254. At the time of enactment of DIDMCA, it was clear that a mortgage creditor's ability to provide credit was severely restricted by state interest rate-cap laws. Furthermore, a 1982 amendment to the Truth in Lending Act, which is used to define a "federally related mortgage" under the National Housing Act, expressly removed persons who arranged credit (mortgage brokers) from the definition of creditor and limited its provisions solely to professional lenders of credit. S. Rep. No. 97-536, at 43 (1982); reprinted in 1982 U.S.C.C.A.N. 3054, 3097. Linda R. Sweeney v. Savings First Mortgage, L.L.C., No. 148, September Term, 2004, filed 9 August 2005. Opinion by Harrell, J. ***TORTS - NEGLIGENCE - PREMISES LIABILITY - DUTY 