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Consumer Credit Regulation: 3.1.2.6 Operating vs. Financial National Bank Subsidiaries

National banks can have “operating” subsidiaries and “financial” subsidiaries, and different rules apply to one versus the other. Operating subsidiaries are those that can engage solely in activities that national banks are permitted to engage in directly. Subsidiaries that can engage in other activities are financial subsidiaries.

Consumer Credit Regulation: 3.2.1 Scope of This Section

Under the Supreme Court’s decision Barnett Bank v. Nelson, state law is preempted to the extent that it prevents or significantly interferes with a national bank’s exercise of its powers.43 This is a conflict preemption standard and is distinct from a national bank’s right to export its home state’s interest rate, which is discussed in § 3.5, infra.

Mortgage Lending: 3.1 The Client Interview

The client interview is extremely important. It defines the scope of the lawyer’s representation, forms the basis of the legal claims, and reveals the client’s goals. Even though mortgage litigation is complex and often involves many different laws, practitioners must avoid becoming so ensnared in the complexities of the law that they fail to focus on the facts. The borrower’s story will feature prominently in a winning case. And the success of the case will be at risk if the client’s lawyer cannot present a compelling story.

Consumer Credit Regulation: 3.2.2.1 General

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 201049 made sweeping changes in the authority of federal banking regulators to preempt state law. These changes apply to both national banks and federal savings associations.50

Consumer Credit Regulation: 3.2.2.3 No Field Preemption

The Dodd-Frank Act provides that neither the National Bank Act nor the Home Owners Loan Act “occup[ies] the field in any area of State law.”77 Unlike the OTS,78 the Office of the Comptroller of the Currency never explicitly purported to occupy the field of lending regulation for national banks.79 But the OCC regulations themselves amounted to virtual field preemption by claiming to preempt all state laws governing lending, deposit taking, and other areas

Mortgage Lending: 5.5 Home Improvement Credit

About half the states have enacted home improvement statutes, requiring licensing or registration of home improvement contractors and, to some extent, regulating their conduct.165 Many of these statutes mandate that the contractor be bonded or obtain insurance, or create a compensation fund.

Consumer Credit Regulation: 3.2.2.4 No Preemption of State Laws That Parallel Federal Requirements

Since the Barnett Bank standard is a conflict preemption standard, it only preempts state laws that conflict with federal banking laws. State laws that parallel federal requirements do not conflict with those requirements and thus are not preempted.83

This is a significant principle because many important state protections are based on or echoed by federal law. For example, this principle should preserve:

Consumer Credit Regulation: 3.2.2.5 Case-by-Case Preemption Determinations; Procedures

The Dodd-Frank Act requires that OCC regulations preempting state consumer financial laws determine, on a case-by-case basis, that a particular state law, or one with substantially equivalent terms, meets the Barnett Bank standard.96 This requirement means that the OCC cannot preempt broad categories of state laws, but can only preempt a “particular” state law that “prevents or significantly interferes” with a bank power.

Consumer Credit Regulation: 7.8.5.2 Common Law Claim That Loan Made Without Required License Is Void

Transactions with lenders who are not licensed, but should be, may be void even in the absence of a special statutory provision to that effect. The common law principle that “contracts made in violation of regulatory statutes enacted for the protection of the public [are] rendered null and unenforceable” has been applied where creditors failed to comply with appropriate licensing requirements.905 This general rule applies to licensing statutes enacted for the protection of the public, rather than those enacted merely to raise revenue.

Consumer Credit Regulation: 7.8.5.3 Other Claims Based on Unlicensed Lending

Even if the usury statutes do not provide a remedy and the common law rule that a contract made in violation of a regulatory statute cannot be invoked, operating without a required license is a UDAP violation in many states.912 In the alternative, a court may be willing to require an unlicensed entity to refund any money a consumer has already paid, on an unjust enrichment theory.913 Depending on the language of the act, aiding and abetting lenders to create a scheme whereby lenders could operat

Consumer Credit Regulation: 7.8.6.1 Remedies Under the National Bank Act and DIDA

The National Bank Act establishes the remedy for a usurious loan issued by a national bank: the lender forfeits the entire contract interest, and the borrower may recover a penalty of twice the interest paid.921 The action must be commenced within two years of the occurrence of the usurious transaction.922 Federal remedies are the same for federal savings associations.923

Consumer Credit Regulation: 7.8.6.2.1 Overview of RICO

The Racketeer Influenced and Corrupt Organizations Act (RICO)928 provides powerful civil remedies,929 including treble damages, injunctive relief,930 and attorney fees, to victims of a broadly defined range of “racketeering activity” and to those who have been subjected to the collection of an “unlawful debt.” “Unlawful debt” includes any usurious debt bearing interest of at least twice the “enforceable rate.”9

Consumer Credit Regulation: 7.8.6.2.3 Alleging a RICO claim based on the collection of an unlawful debt

An unlawful debt is either an illegal gambling debt953 or a debt incurred through the “business of lending money or a thing of value” at a usurious rate, provided that any part of the principal or interest is unenforceable under state or federal usury law and the rate charged is at least twice the enforceable rate.954 The plaintiff must be able to point to a federal or state usury statute that sets the rate that the transaction exceeded.955

Consumer Credit Regulation: 7.8.6.2.5 RICO and creditor overcharges

A number of RICO cases involving allegedly fraudulent creditor overcharges have been litigated.989 For example, the Supreme Court allowed a RICO claim to proceed against a bank that, after contracting to lend to a business at the “prime rate” that it charged its most creditworthy customers, in fact lent at a higher rate.990 The mailing of interest statements assessing excessive interest constitutes mail fraud and provides the underlying “predicate offense” to support such a RICO action.

Consumer Credit Regulation: 7.8.7 Class Actions

Usury cases are well-suited to class action treatment.1015 Lenders who overcharge typically do so systematically, so there are common issues of law or fact.1016 Often each borrower is entitled to a relatively small recovery, such as double the amount of the overcharge. A primary purpose of class actions is to provide a way to recover damage awards that are too small to make individual suits economically feasible.1017

Consumer Credit Regulation: 7.8.7a Who Is Liable for Usury Violations?

Many state lending laws provide remedies for, among other things, “receiving” usurious interest.1025 Liability under such a law can extend beyond the lender that contracted with the borrower, if the usurious charges were funneled to another person or company.1026 It may also be possible to hold an individual liable by piercing the corporate veil.1027