State Anti-Predatory Lending Laws and Federal Preemption

1. State Anti-Predatory Lending Laws and Federal Preemption Allen Fishbein Consumer Federation of America www.consumerfed.org Predatory Lending Conference Metropolitan Washington Council of Governments Conference April 27, 2006

2. Current Federal Laws and Remedies Are Limited in Their Ability to Combat Predatory Mortgage Lending • Predatory lenders aggressively exploit regulatory gaps to great profit • Numerous states have sought to fill these gaps by passing stronger anti-predatory lending curbs than federal law requires • federal regulators have aggressively used preemption powers to avoid having state laws apply to the lenders they supervise

3. Key Federal Consumer Protection Laws • Truth in Lending Act (TILA) requires lender disclosure to consumers of loan costs -- disclosure of annual percentage rate (APR) -- permits private right of action for violations -- rescission remedy • Home Ownership and Equity Protection Act (HOEPA) -- amendment to TILA -- Congress recognized high-cost loan borrowers vulnerable to predatory lenders unaffected by TILA disclosure regulations -- broad assignee liability -- useful, but limited -- predatory lenders learned to avoid (covers less than 1% of subprime market)

4. Federal Regulatory Activity • Feds have limited jurisdiction over majority of subprime lenders (SP), where most predatory abuse occurs • Depository institutions (i.e., banks, thrifts, credit unions) account for estimated 1/3 of SP lending • Federal banking regulators have limited authority to regulate activities of non-bank mortgage lenders • Non-federally supervised, nonbank SP lenders represent estimated 2/3 or more of market • FTC has taken some actions against predatory lenders using “unfair and deceptive practices” authority, but no exam regime

5. Background on the Regulatory Preemption Debate • Preemption is rooted in the U.S. Constitution’s Supremacy Clause, which makes federal law the “supreme law of the land” (U.S. Const. Article VI, cl. 2) • Federal law preempts or supersedes contrary state or local laws • Courts generally decide preemption questions by following what they believe to be the intent of Congress; this can be quite complicated • Different forms of Congressional intent -- Congress expressly states intention (“express” preemption) -- Implied from federal statute’s purpose (“implied” preemption) (e.g., “conflict preemption” or “field preemption”)

6. Federal v. State & Consumers • Federally chartered banks and thrifts maintain that state and local anti-predatory lending laws are not applicable to them • OTS and OCC have backed them up by preempting state laws which, they say interfere with a federally chartered lenders right to operate • States, their attorneys general and consumer groups have objected, maintaining that state laws pertaining to predatory lending, consumer protection and unfair and deceptive practices should apply to all lenders operating within a state

7. OTS Preemption • Home Owners’ Loan Act (HOLA) governing statute for federally chartered thrifts (S&Ls) • OTS has concluded statute provides “plenary and exclusive” authority and thereby “occupies the field” of regulation for federal thrifts • OTS has preempted state predatory lending laws if they regulate any aspect of the terms of credit, loan-related fees, disclosures, or the ability of thrifts to originate or finance loans • Operating subsidiaries also preempted • OTS preemption likely to have little impact – few thrifts engaged in SP lending

8. OCC Preemption • National Banking Act (NBA) authorizes OCC to provide federal banking charters • Grants national banks “all such incidental powers as shall be necessary to carry on the business of banking” • Until 2004, OCC did not claim it occupied the entire field of regulation, relied upon direct conflict between state laws and federal regulations

9. OCC Preemption, cont’d • On January 7, 2004, OCC issued new regulations that preempt a broad range of state laws from applying to national bank activities • OCC rule allows national banks to presume that certain categories of state laws are preempted if they “obstruct, impair or condition” a national bank’s ability to fully exercise its federally authorized powers, either directly or through operating subsidiaries • OCC rules effectively bar the application of all state laws to national banks, except where -- Congress expressly incorporated state law standards -- particular state laws only have an incidental effect

10. OCC Preemption, cont’d • Incidental” effect only if such laws – -- are part of “the legal infrastructure that makes it practicable” for national banks to conduct their federally authorized activities, and -- “do not regulate the manner or content of the business of banking authorized for national banks” • OCC rule also asserts exclusive visitation rights over national banks and their operating subsidiaries (i.e., even those state laws that continue to apply must be enforced through the OCC) • OCC indicated rule does not preempt state UDAP and fair lending laws

11. OCC preemption, cont’d • OCC rule also asserts exclusive visitation rights over national banks and their non-bank operating subsidiaries (i.e., state AGs barred from enforcing even those state laws that continue to apply) • OCC also adopted rules advising national banks on how to avoid engaging in predatory lending -- based largely on safety and soundness considerations -- enforcement only comes through reliance on FTC UDAP authority -- does not provide any additional enforcement rights for individual consumers

12. OCC preemption, cont’d • States and consumer advocates claim that the OCC is overreaching; federal bills introduced to roll back OCC authority • Practical impact – federally chartered lenders and their operating subsidiaries immune from state predatory lending laws

13. Impact on State Chartered Banks and Other State Chartered Non-bank Lenders • State predatory lending laws apply to state chartered banks, unless “wild card” or parity laws exist that exempt them to the same extent as for national banks • State laws continue to apply to non-bank lenders (except for federal bank operating subsidiaries) which still comprise vast majority SP lenders

14. Congressional Preemption • Federal predatory lending bills pending in Congress could result in further preemptions • Ney/Kanjorski (HR 1295) - includes very broad federal preemption effectively wipes out state protections for homeowners: --preemption would apply to all lenders (i.e., federal banks, state banks, and non bank mortgage and finance companies) -- apply to state foreclosure, broker regulation, and other related laws • Miller/Watt/Frank (HR 1182) – Sets a floor for minimum standards. Retains right of states to address mortgage lending abuses

15. Benefits of Continuing State and Local Involvement in Efforts to Curb Predatory Lending • Federalist approach involving federal, state, and local enforcement officials maximizes the number of “cops on the beat” available to protect consumers • State AGs’ enforcement important to deterring predatory lending -- Settlements involving large SP lenders (see, AG settlements with Household Finance, more recently with Ameriquest

16. Benefits of State Enforcement, cont’d • “Laboratories for Experimentation” -- states can respond more quickly to local needs -- innovative solutions can be tested (without risk nationally) -- eventual adoption at the federal level (e.g., 1999 NC anti-predatory lending law today seen as the “gold standard”) • Preemption may promote greater national uniformity, but not necessarily in best interest of consumers

17. In sum: State and local officials have a great stake in preemption proposals before Congress