Iowa Banking Law Blog

The Mighty Sword of Preemption Sheathed; State AGs Can Enforce State Lending Laws

The battle between federal banking regulation and state regulation of national banks has been brewing for years.  It has been primarily a one-sided battle; the OCC has wielded the mighty sword of preemption and consistently vanquished state regulators, with their consumer protection warhorn around their neck, in courtrooms across the country.  The OCC has aggressively maintained its power to preempt state laws that affect national banks’ federally authorized activities.  State regulators have argued that the broad preemption endorsed by the OCC weakens state consumer protection and fair lending laws.  In Cuomo v. Clearing House Association, LLC, the Supreme Court ruled in favor of state regulation, at least partially, forcing the OCC to sheath its mighty sword in state judicial enforcement actions. 

 

In Cuomo, the New York Attorney General sent letters to various national banks requesting nonpublic information regarding their lending practices.  The AG was investigating the banks' residential lending practices for violations of the state fair lending laws.  The OCC and a trade group for the banks brought suit to enjoin the request claiming that the National Bank Act preempts the enforcement of state fair lending laws against national banks.  The Court held that the NBA does not prohibit the ordinary enforcement of state law.  The Court clearly delineated between any purported state “visitorial powers” or general oversight of national banks, which is preempted by the NBA, and the “prosecution enforcement actions,” which is not preempted.  When the state sues to enforce a state law against a national bank, it is not exercising visitorial or oversight powers; it is exercising its power to enforce state law.  Thus, the New York Attorney General could not simply request nonpublic lending information from national banks, but could bring suit or get a judicial search warrant and obtain the information though legal channels.  Under the Court’s ruling, only the OCC can exercise administrative visitorial oversight of national banks.  Substantive state law, on the other hand, can be enforced judicially by state authorities. 

 

This decision levels the playing field between state and national banks.  National banks now must clearly abide by the same fair lending and consumer protection laws as state banks.  The decision also will likely increase the regulatory burden on national banks, as they will have to be sure to comply with the differing consumer protection and lending laws of individual states.  It is unclear at this time how this decision will fit into the Obama administration's planned reform of the banking system.  For the time being, however, the mighty sword of preemption has lost a bit of its shine, and the warhorns of state attorney generals are sounding across the nation.

 

If you have questions, please contact Jeff Andersen at 515-246-4503 or jandersen@dickinsonlaw.com.

OCC Wins Another Federal Preemption Case

The Second Circuit recently upheld a ruling stating that the OCC is the exclusive enforcer of banking laws for national banks in Clearing House Association, LLC v. Cuomo, 2007 WL 4233358.  In 2005, the Attorney General of New York sought non-public mortgage lending information of several national banks to investigate possible violations of anti-discrimination laws.  The OCC opposed the AG's investigation on the basis that it has sole visitorial powers over national banks.  The lower court ruled in favor of the OCC and was affirmed by the Second Circuit.  The court stated that Congress has expressly limited the role of states in regulating national banks "especially when such conduct involves the exercise of powers granted to the banks by federal statute and regulation . . . ." 

The Second Circuit did overturn one aspect of the decision.  In the lower court the AG unsuccessfully argued that it had the right to access national bank records to enforce the Fair Housing Act.  On appeal, the court determined that this issue was not ripe and remanded the decision with instructions to dismiss.  It is unclear whether this issue will be revisited.   

Post Watters v. Wachovia cases have consistently held in favor of broad federal preemption.  This case does not seem to advance federal preemption any further, it is just another affirmation of preemption's reach.  All in all its just another brick in the post-Watters v. Wachovia wall.  Expect state attorney generals to continue to try to the climb the wall.    

Court Holds State Licensing Laws Not Preempted By Federal Law

In State Farm Bank, F.S.B. v. John B. Reardon, a case out of the Southern District of Ohio, a federal judge ruled that a thrift's independent contractors are subject to state licensing laws.  State Farm Bank ("SFB") used independent contractors to sell insurance and commercial retail bank products.  It sought to have these agents market mortgages.  In 2004, State Farm Bank was issued a formal opinion from OTS counsel stating that federal law preempts state laws relating to the banking activities of SFB's independent contractors.  SFB notified the Ohio Superintendent of this opinion, but the Superintendent maintained that state law requiring mortgage broker licenses was not preempted.

The court concluded that "while the OTS may have the authority to extend federal preemption to agents of federal depository institutions, it has failed to comply with the Administrative Procedures Act in its efforts to do so."  It held that the OTS could only extend preemption to independent third parties through a formal regulation issued after publication and public hearing.  The letter signed by OTS counsel was insufficient.  The court went on to state that the "mortgage foreclosure crisis" underscores the need to follow the Administrative Procedure Act and that the OTS's proposal would create a situation in which certain mortgage brokers are not licensed by state or federal law.  In sum, the court stated that the OTS may have the authority to preempt the state licensing statutes at issue, but did not take the necessary Administrative steps necessary to effect such preemption.   

The court distinguished Watters v. Wachovia on the basis that Watters dealt with operating subsidiaries of national banks.  While these subsidiaries are supervised and regulated by the OCC to the same extent as the parent bank, wholly independent contractors are not. 

This case is contrary to a 2006 case out of Connecticut with very similar facts.  In State Farm Bank, F.S.B. v. Burke, the court held that OTS regulations preempted state licensing laws.  That court declined to address the argument that the Opinion Letter had not followed the Administrative Procedure Act.  State Farm Bank appealed the decision. 

The facts in these two cases exemplify the delicate nature of many Opinion Letters -- is it an interpretation of existing laws and regulations or is it an improper change in the law?  Also, the Ohio case shows that the preemption tug-of-war is far from over.   

For more information on this case contact Jeffrey Andersen.

Usury Preemption Follows Its Debt: Non-bank purchasers of debt enjoy the same state usury exemption as the national bank originating the loan

As reported in the September 13, 2007 American Banker, a federal judge dismissed a borrower’s Fair Debt Collection Practices Act (FDCPA) claim, concluding the National Bank Act (NBA) usury preemption benefits non-bank buyers of charged-off debt to the same extent it benefits the national bank originating the loan. See Munoz v. Pipestone Fin., LLC, No. 04-4142 (JNE/SRN), 2007 U.S. Dist. LEXIS 64314 (D. Minn. Aug. 30, 2007).

The plaintiff, Douglas Munoz, claimed Pipestone Financial violated FDCPA by trying to collect usurious interest on a debt it purchased. Munoz opened a credit card account with First USA Bank of Delaware (First USA) and eventually defaulted on about $7,500 of debt. First USA assigned the debt to Unifund CCR Partners, who in turn sold the account to Pipestone.

The FDCPA prohibits debt collectors from collecting interest unauthorized by contract or by law. Minnesota law limits interest rates to 8%. Nevertheless, Pipestone continued charging Munoz the 11.99% interest rate established in the original First USA card member agreement.

Although state law prohibited Pipestone from charging interest rates over 8%, the NBA authorized First USA, a national bank chartered in Delaware, to charge Munoz 11.99%. Because the national bank originated Munoz’s loan, that debt remained subject to preemption, even though non-bank Pipestone bought the debt. The court held it "must look at the originating entity (the bank), and not the ongoing assignee" to determine whether the NBA applied. A national bank originated the loan, so the debt enjoyed exemption from state usury laws and Pipestone properly charged Munoz the 11.99% interest rate provided by his card member agreement.

Any contrary ruling would have dramatically impacted the banking industry. If the court had declared buyers of charged-off debt to be subject to state usury laws, card issuers would have faced incredible challenges in trying to sell charged-off receivables.

For further information contact Megan Erickson of Dickinson Mackaman Tyler & Hagen, P.C.