• The OCC's New Rule: Federal Preemption of State Laws
  • February 5, 2004
  • Law Firm: Blank Rome LLP - Philadelphia Office
  • On January 7, the Office of the Comptroller of the Currency ("OCC") released final regulations ("New Rule") stating when federal law overrides state law for national banks and their subsidiaries. The New Rule sets forth the types of state laws that are preempted, as well as those that are not preempted with respect to national banks. In addition, the New Rule also adopts new anti-predatory lending standards for national banks.

    The New Rule instructs that state laws that "obstruct, impair or condition" a national bank's powers in the areas of lending, deposit-taking and other national bank operations are not applicable to national banks. The New Rule specifically identifies the applicability of state law to national banks' deposit-taking, real-estate lending, and other lending activities. Laws that are preempted for lending activities include licensing laws, laws that address the terms of credit, permissible rates of interest, escrow accounts, disclosure, and advertising. Laws that are preempted for deposit-taking include laws that address abandoned and dormant accounts, checking accounts, and funds availability, as well as disclosure, licensing, and registration requirements. The OCC notes that these lists are not intended to be exhaustive and that the OCC may identify, and address on a case-by-case basis, other types of state laws that are preempted.

    State laws that are not preempted and would be applicable to national banks include laws on contracts, rights to collect debts, acquisition and transfer of property, taxation, zoning, crimes, and torts. In addition, any other law the OCC determines to only incidentally affect national banks' lending, deposit-taking, or other operations will not be preempted.

    The New Rule also includes an anti-predatory lending provision which prohibits a national bank from making any type of consumer loan based predominately on the bank's realization of the foreclosure or liquidation value of the borrower's collateral, without regard to the borrower's ability to repay the loan according to its terms. This anti-predatory lending provision under the New Rule applies uniformly to all consumer lending activities conducted by national banks, wherever located.

    The New Rule also includes a provision that a national bank may not engage in unfair and deceptive practices within the meaning of the Federal Trade Commission Act. The OCC notes that although it does not have the authority to issue regulations defining particular acts or practices as unfair and deceptive under the Federal Trade Commission Act, the OCC does have the authority to take enforcement actions where a national bank is found to have engaged in unfair or deceptive practices.

    Prior to the release of the New Rule much debate was triggered by the OCC's proposed regulations. Members of Congress, state attorneys general and state banking commissioners had urged the OCC not to proceed with the issuance of the New Rule. Other groups also opposing the proposed regulations were consumer protection and consumer activist groups and real estate agents. Members of Congress urged that for many years it has been widely accepted by the United States Supreme Court, as well as in actual practice, that national banks are subject to state laws that do not discriminate against or significantly burden the operations of national banks. For example, they noted that many states have routinely licensed and regulated separately incorporated mortgage companies that happen to be subsidiaries of national banks. Additionally, states regularly have enforced their unfair and deceptive practices laws against national banks without controversy as to the states' enforcement role. However, under the New Rule traditional state functions would change. Members of Congress noted that the OCC's actions and proposals would dramatically alter established preemption standards and would radically affect state-federal relations and consumer protection in banking.

    In defense of the New Rule, the OCC in announcing the New Rule stated one of the reasons for the New Rule is that national banks are already subject to a comprehensive set of federal requirements, and the overlay of multiple state law standards imposes unnecessary and excessively costly burdens. The OCC further noted what the New Rule is not. The OCC stated that it is not authorizing any new national bank activities or powers, such as the ability to engage in real estate brokerage. The OCC also noted that, although the statute authorizing national banks' real estate lending activities could permit the OCC to occupy the field of national bank real estate lending through regulation, the OCC has declined to announce its position on this in the New Rule. The OCC further noted that the New Rule makes no changes to the OCC's rules governing subsidiaries. National bank operating subsidiaries conduct their activities subject to the same terms and conditions that apply to the parent banks. Therefore, the OCC noted that by virtue of prior regulations, the New Rule applies equally to national banks and their operating subsidiaries.

    The OCC claims that the New Rule will enhance the dual banking system and as well as promote consumer protection. Banking groups generally praised the New Rule, noting that it will ease the business of banking while benefiting consumers. Critics prior to the New Rule's issuance claimed that the OCC's actions will drastically and negatively affect the dual banking system and that consumers will be hurt. Many believe that it is likely that the New Rule will face challenges from Congress and the courts. Time, potential litigation, and anticipated Congressional hearings will tell who will win this debate.

    The New Rule becomes effective February 12, 2004.