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Mortgage Lending: 5.8.4 Unconscionability and Preemption

When an unconscionability claim is brought under state law against a national bank or federal savings association, questions arise as to whether federal law preempts it. One federal court, in considering such a preemption issue, determined that there was no black-and-white answer, and it depended on whether the conduct being challenged was authorized by federal regulation.

Consumer Credit Regulation: 3.2.4.12.1 Overview

As noted in § 3.2.3.1, supra, the OCC rule on non-mortgage lending has a savings clause that lists seven areas of state law that are not inconsistent with the powers of a national bank and that apply to national banks to the extent consistent with Barnett Bank: contracts, torts, criminal law, rights to collect debts, acquisitions and transfers of property, taxation, and zoning.

Consumer Credit Regulation: 3.2.4.12.2 Contract and UCC claims

The NBA and OCC regulations do not preempt contract claims, such as a claim that a bank breached its contract with the consumer.257 Such a claim does not prohibit a bank from engaging in any particular activities or charging any fees, but merely seeks to force it to adhere to the contracts it creates.258

Consumer Credit Regulation: 3.2.4.12.3 Fraud and UDAP claims

Since the savings clause lists tort law as an area that is not generally preempted, it is clear that common law fraud claims are preserved.271 A few courts have, however, given an extraordinarily broad reading to the term “disclosure,” holding that any claim of fraudulent misrepresentation or suppression is, in essence, a disclosure claim and therefore preempted under the 2004 OCC rule.272 This view should be given no weight in light of the Dodd-Frank amendments, and, in fact, typifies the overb

Consumer Credit Regulation: 3.2.5 Barnett Bank Preemption Does Not Apply to Subsidiaries, Affiliates, or Agents

Barnett Bank preemption of state law applies only to credit originated by national banks and federal savings associations, and not to credit originated by their subsidiaries, affiliates, or agents. Prior to the Dodd-Frank Act, OCC regulations297 purported to preempt state law, not just as applied to national banks but also as applied to national banks’ operating subsidiaries (but not financial subsidiaries298).

Consumer Credit Regulation: 3.2.6 State Restrictions on a Non-Bank’s Terms of Credit and Practices Apply Regardless of Assignment to a Bank

Preemption issues become particularly knotty when an obligation originated by a non-bank is assigned to a national bank or federal savings association.

Most courts have held that state law restrictions regarding the terms of the obligation continue to apply to a bank or thrift assignee.319 But some pre-Dodd-Frank cases have held that federal banking law preempts state law restrictions on national banks or federal savings association assignees.320

Consumer Credit Regulation: 3.3.1 General

The Depository Institutions Deregulation and Monetary Control Act of 1980 (DIDA, also sometimes called DIDMCA) preempts state interest rate regulation as to state-chartered banks.328 The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (Riegle-Neal) was amended in 1997 (sometimes called Riegle-Neal II) to preempt state credit regulation other than as to interest rates of out-of-state branches of state-chartered banks.

Consumer Credit Regulation: 3.3.2 Definitions of State Bank and Branch

Key terms in the application of Riegle-Neal II are the definitions of “branch” and “bank.” The term “branch” is strictly defined to mean a physical location: “any branch bank, branch office, branch agency, additional office, or any branch place of business located in” any state or dependency “at which deposits are received or checks paid or money lent,” and “does not include an automated teller machine or a remote service unit.”335 A loan broker or other third party arranging credit

Consumer Credit Regulation: 3.3.5 Riegle-Neal II Preemption Inapplicable to State Banks Without Host State Branch

For Riegle-Neal II preemption to apply, there must be strict compliance with Riegle-Neal II’s statutory language. Riegle-Neal II extends preemption only to credit offered by a host state branch of an out-of-state, state bank. If an out-of-state, state-chartered bank does not have branches in the host state, then Riegle-Neal II does not apply. Riegle-Neal II states that it “shall apply to any branch in the host State of an out-of-State State bank.”344

Consumer Credit Regulation: 3.3.6 Riegle-Neal II Preemption Where Main Office, Not Host State Branch Extends Credit

An unresolved issue is the application of Riegle-Neal II preemption to an out-of-state bank with a branch in the host state, where the loan is not extended by that branch, and where the loan functions are performed instead at a bank office outside the host state. Consider a predatory non-bank lender soliciting business in the host state, and where it arranges for the loans to be originated directly with the main office of an out-of-state, state-chartered bank and not at the bank’s host state branch. Does Riegle-Neal II apply?

Consumer Credit Regulation: 3.5.1 General

When a consumer brings a usury claim in the consumer’s state of residence and the creditor is located in another state, ordinarily the choice of laws principles of the state where the case is brought determine which state’s usury law applies.371 Often, the state’s fundamental policy of enforcing its own interest rate laws will override the choice of law provision in a contract.

Consumer Credit Regulation: 3.5.2.3.1 Overview of the Depository Institutions Deregulation and Monetary Control Act of 1980 (DIDA or DIDMCA)

The Depository Institutions Deregulation and Monetary Control Act of 1980 (DIDA, also sometimes called DIDMCA), which amended the Federal Deposit Insurance Act (FDIA), provides that federally insured, state-chartered depositories (banks, savings banks, and credit unions) can charge the higher of 1% above the federal discount rate, the rate chosen by the host state’s law, or the rate allowed by the institution’s home state.

Consumer Credit Regulation: 3.5.2.5 Special Rule for Arkansas State Banks

There is a special rate provision in 12 U.S.C. § 1831u(f) that applies only to states with a constitutional provision limiting the maximum lawful rate of interest on a contract to no more than 5% above the discount rate for ninety-day commercial paper in effect at the federal reserve bank for the federal reserve district in which such state is located. This provision applies only to Arkansas.443

Consumer Credit Regulation: 3.5.2.6 Subsidiaries of Depositories

Rate exportation does not apply to subsidiaries of national banks or federal savings associations. Prior to the Dodd-Frank Act, the Supreme Court interpreted federal law as allowing national bank “operating” subsidiaries (but not “financial” subsidiaries446) to be treated the same as the national banks,447 and this implied that a national bank’s operating subsidiary could export its home state rate caps.