[Federal Register: February 26, 2003 (Volume 68, Number 38)]
[Notices]
[Page 8959-8964]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr26fe03-112]
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DEPARTMENT OF THE TREASURY
Office of the Comptroller of the Currency
[Docket No. 03-04]
Notice of Request for Preemption Determination or Order
AGENCY: Office of the Comptroller of the Currency, Treasury.
ACTION: Notice and request for comments.
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SUMMARY: The Office of the Comptroller of the Currency (OCC) is
publishing for comment a request by National City Bank, N.A., National
City Bank of Indiana, N.A., and their operating subsidiaries, National
City Mortgage Company and First Franklin Financial Company (referred to
collectively in this notice as National City) for a determination or
order under 12 U.S.C. 24(Seventh), 12 U.S.C. 371 and the OCC's
implementing regulations, that the Georgia Fair Lending Act does not
apply to National City. The purpose of this notice is to afford
interested persons and affected parties an opportunity to submit
comments before the OCC issues any determination or order responding to
this request.
DATES: Comments must be received on or before March 28, 2003.
ADDRESSES: Please direct your comments to: Office of the Comptroller of
the Currency, 250 E Street, SW., Public Information Room, Mailstop 1-5,
Attention: Docket No. 03-04, Washington, DC 20219, fax number (202)
874-4448, or Internet address: regs.comments@occ.treas.gov. Due to
delays in paper mail delivery in the Washington area, commenters are
encouraged to submit their comments by fax or e-mail. Comments may be
inspected and photocopied at the OCC's Public Reference Room, 250 E
Street, SW., Washington, DC 20219. You can make an appointment to
inspect or photocopy the comments by calling (202) 874-5043.
FOR FURTHER INFORMATION CONTACT: Michele Meyer, Counsel, Legislative
and Regulatory Activities Division, (202) 874-5090.
SUPPLEMENTARY INFORMATION: The Georgia Fair Lending Act (GFLA) \1\
became effective October 1, 2002. The GFLA restricts the ability of
creditors or servicers to charge certain fees and engage in certain
practices for three categories of loans defined by the GFLA: ``home
loans,'' ``covered home loans,'' and ``high-cost home loans.'' The
characterization of a loan within each of these categories depends on
the annual percentage rate and the amount of points and fees
charged.\2\ All ``home loans'' are subject to certain restrictions on
the terms of credit and loan-related fees, including prohibitions on
the financing of credit insurance, debt cancellation coverage or
suspension coverage, and limitations on late fees and payoff statement
fees.
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\1\ The GFLA is to be codified as GA Code. Ann. Sec. Sec. 7-6A-
1 et seq.
\2\ See GFLA Sec. 7-6A-2.
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In addition to the restrictions on ``home loans,'' ``covered home
loans'' are subject to restrictions on the number of times a loan may
be refinanced and the circumstances in which a refinancing may occur.
For example, the GFLA prohibits a creditor from refinancing an existing
home loan that is less than five years old with a ``covered home loan''
that does not provide a reasonable ``tangible net benefit'' to the
borrower considering all the circumstances.
``High-cost home loans'' are subject to the restrictions on ``home
loans'' and ``covered home loans,'' as well as numerous disclosure
requirements and restrictions on the terms of credit and
[[Page 8960]]
loan-related fees. Creditors must disclose to borrowers that the loan
is high-cost, and borrowers must attend loan counseling before the
creditor may make the loan. In addition, the GFLA prohibits pre-payment
penalties, balloon payments, negative amortization, increases in the
interest rates after default, advance payments from loan proceeds, fees
to modify, renew, extend, amend or defer a payment, and accelerating
payments at the creditor's or servicer's sole discretion.
National City requests the OCC to issue a determination or order
that 12 U.S.C. 24(Seventh), 12 U.S.C. 371 and their implementing
regulations preempt the GFLA. A copy of the request appears as an
Appendix to this notice. We will publish any final determination or
order responding to National City's request in the Federal Register.
Regardless of the ultimate conclusion reached regarding preemption
of the GFLA or any other similar state or local law, abusive and
predatory lending practices that take unfair advantage of borrowers, or
have a detrimental effect on communities, may violate a number of
federal laws, and do conflict with the high standards by which the OCC
expects national banks to conduct their operations. Accordingly,
concurrent with issuance of this Notice of Request for Preemption
Determination or Order, the OCC is issuing two Advisory Letters.
Advisory Letter 2003-2, ``Guidelines for National Banks to Guard
Against Predatory and Abusive Lending Practices,'' February 21, 2003,
and Advisory Letter 2003-3, ``Avoiding Predatory and Abusive Lending
Practices in Brokered and Purchased Loans,'' February 21, 2003.
Together these two Advisory Letters set forth standards that should
assure that national banks are not directly involved, or indirectly
associated with, predatory or abusive lending practices.
Issues Presented by National City's Request
National City has the asked the OCC to determine that 12 U.S.C.
24(Seventh) and 371 preempt the GFLA. This request requires determining
whether ``Congress, in enacting the Federal Statute, intend[ed] to
exercise its constitutionally delegated authority to set aside the laws
of a State.'' Barnett Bank of Marion County, N.A. v. Nelson, et al.\3\
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\3\ 517 U.S. 25, 30 (1996).
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Central to the issues raised by National City is 12 U.S.C. 371,
which vests in the OCC comprehensive authority to regulate and restrict
the real estate lending activities of national banks. Section 371
provides:
[a]ny national banking association may make, arrange, purchase
or sell loans or extensions of credit secured by liens on interests
in real estate, subject to section 1828(o) of this title and such
restrictions and requirements as the Comptroller of the Currency may
prescribe by regulation or order.
The exercise of the powers granted by section 371 is not
conditioned on compliance with any state requirement.\4\ Notably, the
exercise of powers under that section is subject only to such rules and
regulations as the Comptroller may prescribe.
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\4\ Subsequent Federal legislation may provide, however, that
national banks shall conduct certain activities subject to state law
standards. For example, national banks conduct insurance sales,
solicitation, and cross-marketing activities subject to certain
types of state restrictions expressly set out in the Gramm-Leach-
Bliley Act. See 15 U.S.C. 6701(d)(2)(B). There is no similar Federal
legislation subjecting national banks' real estate lending
activities to state law standards.
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In Barnett, the Supreme Court analyzed a similarly structured
statute, 12 U.S.C. 92 and the extent to which section 92 leaves room
for state regulation of the activities the statute authorizes. There,
the Supreme Court stated that:
[section 92's] language suggests a broad, not a limited,
permission. That language says, without relevant qualification, that
national banks ``may * * * act as the agent'' for insurance sales.
12 U.S.C. 92. It specifically refers to ``rules and regulations''
that will govern such sales, while citing as their source not state
law, but the federal Comptroller of the Currency.\5\
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\5\ Barnett, 517 U.S. at 32.
The Court concluded that ``where Congress has not expressly conditioned
the grant of ``power'' upon a grant of state permission, the Court has
ordinarily found that no such condition applies.'' \6\
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\6\ Id. at 34.
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The Congressional delegation to the Comptroller of authority under
section 371 mentions only conditions imposed by the OCC for national
banks pursuant to section 1828(o) and ``such restrictions and
requirements as the Comptroller of the Currency may prescribe by
regulation or order.'' It makes no mention of conditions imposed by
state law. Citing the judicial maxim of statutory interpretation
expressio unius est exclusio alterius (``mention of one thing implies
exclusion of another''), National City contends that this plain
language evidences a Congressional intent to permit only the OCC to
impose conditions on national bank real estate lending regulation,
leaving no room for state involvement.
The legislative history of section 371 lends support to this
construction. National banks' real estate lending activities have
consistently been subject to comprehensive Federal regulation ever
since the authority to lend on the security of real estate was first
granted to them in the Federal Reserve Act of 1913. For many years,
national banks' real estate lending authority was governed by the
express terms of section 371. As originally enacted in 1913, section
371 contained a limited grant of authority to national banks to lend on
the security of ``improved and unencumbered farm land, situated within
its Federal reserve district.'' \7\ In addition to the geographic
limits inherent in this authorization, the Federal Reserve Act also
imposed limits on the term and amount of each loan as well as an
aggregate lending limit. Over the years, section 371 was repeatedly
amended to broaden the types of real estate loans national banks were
permitted to make, to expand geographic limits, and to modify loan term
limits and per-loan and aggregate lending limits. In 1982, Congress
removed these ``rigid statutory limitations'' \8\ in favor of a broad
provision authorizing national banks to ``make, arrange, purchase, or
sell loans or extensions of credit secured by liens on interest in real
estate, subject to such terms, conditions, and limitations as may be
prescribed by the Comptroller of the Currency by order, rule, or
regulation.'' \9\ The purpose of the 1982 amendment was ``to provide
national banks with the ability to engage in more creative and flexible
financing, and to become stronger participants in the home financing
market.'' \10\ In 1991, Congress removed the term ``rule'' from this
phrase \11\ and enacted an additional requirement, codified at 12
U.S.C. 1828(o), that national banks (and other insured depository
institutions) conduct real estate lending pursuant to ``uniform
standards'' adopted at the Federal level by regulation of the OCC and
the other Federal banking agencies.\12\ Thus, the history of national
banks' real estate lending activities under section 371 is one of
extensive Congressional involvement gradually giving way to a
[[Page 8961]]
streamlined approach in which Congress has delegated broad authority to
the Comptroller.\13\ It may therefore be argued that section 371
evidences an intent for the OCC to occupy the field of regulation of
national banks' real estate lending except, of course, where Congress
in other legislation has made them subject to additional requirements,
e.g. the Truth in Lending Act.\14\
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\7\ Federal Reserve Act, ch. 6, Sec. 24, 38 Stat. 251, 273
(1913).
\8\ S. Rep. No. 97-536, at 27 (1982).
\9\ Garn-St Germain Depository Institutions Act of 1982, Pub. L.
97-320, Sec. 403, 96 Stat. 1469, 1510-11 (1982).
\10\ S. Rep. No. 97-536, at 27 (1982).
\11\ This language was changed without explanation.
\12\ Section 304 of the Federal Deposit Insurance Corporation
Improvement Act, 12 U.S.C. 1828(o). These standards governing
national banks' real estate lending are set forth in subpart D of
part 34.
\13\ We note that in Rice v. Santa Fe Elevator Corp., 331 U.S.
218 (1946), the Supreme Court considered a statute that had been
similarly revised to delegate exclusive authority under it to the
Secretary of Agriculture. Even though the statutory revision in
question in Rice authorized the Secretary ``to cooperate with State
officials,'' the Supreme Court found the revision evidence that
Congress acted ``so unequivocally as to make clear that it intends
no regulation except its own.'' Id. at 236.
\14\ 15 U.S.C. 1601 et seq.
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The OCC has implemented section 371 in regulations set forth at 12
CFR part 34. Subpart A of part 34, by its terms, applies to both
national banks and their operating subsidiaries.\15\ Twelve CFR 34.3
establishes the general rule that a national bank and its operating
subsidiaries may engage in real estate lending subject only to the
``terms, conditions, and limitations prescribed by the Comptroller of
the Currency by regulation or order.'' Twelve CFR 34.4(a) expressly
provides that five types of state law limitations are not applicable to
real estate loans made by national banks and their operating
subsidiaries:
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\15\ See 12 CFR 34.1(b).
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(a) Specific preemption. A national bank may make real estate loans
under 12 U.S.C. 371 and Sec. 34.3 without regard to State law
limitations concerning:
(1) The amount of a loan in relation to the appraised value of the
real estate;
(2) The schedule for the repayment of principal and interest;
(3) The term to maturity of the loan;
(4) The aggregate amount of funds that may be loaned upon the
security of real estate; and
(5) The covenants and restrictions that must be contained in a
lease to qualify the leasehold as acceptable security for a real estate
loan.
It would appear that a number of GFLA provisions fall within the
scope of Sec. 34.4(a). For example, National City argues that a number
of GFLA prohibitions, including those on balloon payments, negative
amortization, advance payments from the loan proceeds and acceleration
at the creditor's or servicer's discretion, are state law limitations
concerning the ``schedule for the repayment of principal and interest''
and are therefore preempted by Sec. 34.4(a)(2).
Twelve CFR 34.4(b) states:
The OCC will apply recognized principles of Federal preemption in
considering whether State laws apply to other aspects of real estate
lending by national banks.\16\
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\16\ See 12 CFR 24.4(b).
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It may be argued that the structure of Sec. 371 and Sec. 34.3,
together with the express preemption delineated in Sec. 34.4(a),
evidence a presumption that state law does not apply to the real estate
lending activities of national banks and their operating subsidiaries
unless the OCC determines under Sec. 34.4(b) that a particular state
law is not preempted. In other words, in ``considering whether state
laws apply'' for purposes of issuing an order under section 371, the
OCC could either issue an order confirming that the law is not
applicable or providing that it will be applicable after applying the
``recognized principles of preemption'' referred to in Sec. 34.4(b).
Thus, in effect, National City argues that section 371 authorizes the
OCC to ``occupy the field'' of real estate lending regulation for
national banks, and that, through its regulations, including Sec.
34.4(a) and (b), the OCC has done so.
Thus, in order to implement Sec. 34.4(b) to determine whether any
of the GFLA provisions not otherwise preempted under Sec. 34.4(a)
apply to National City, the OCC examines whether the state law ``stands
as an obstacle to the accomplishment and execution of the full purposes
and objectives of Congress.'' \17\ In the present context, the OCC must
examine the effect that the state law provisions have on a national
bank's exercise of the federally authorized power to engage in real
estate lending granted by Federal statutes, including 12 U.S.C.
371.\18\ As set out in detail in its request, National City asserts
that various GFLA provisions place impermissible limits on the exercise
of national banks' real estate lending powers under 12 U.S.C. 371 and
place impermissible limits on the exercise of national banks' authority
to lend money generally under 12 U.S.C. 24(Seventh) and to charge fees
for lending products or services.\19\
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\17\ Barnett, 517 U.S. at 31, quoting Hines v. Davidowitz, 312
U.S. 52, 67 (1941).
\18\ As explained below, National City also argues that a number
of GFLA provisions impair the bank's ability to exercise its general
lending authority under 12 U.S.C. 24 (Seventh).
\19\ The OCC's regulation at 12 CFR 7.4002 reaffirms that
ability to charge a fee for a bank's services.
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National City accordingly requests the OCC to issue a determination
or an order under 12 U.S.C. 24(Seventh) and 12 U.S.C. 371 that the
identified provisions of the GFLA do not apply to National City.
Request for Comments
The OCC solicits comment on the issues raised by the National City
request.
Dated: February 13, 2003.
John D. Hawke, Jr.,
Comptroller of the Currency.
Appendix--National City's Request
February 11, 2003.
Julie L. Williams, First Senior Deputy Comptroller of the Currency
and Chief Counsel, Office of the Comptroller of the Currency, 250 E.
Street, SW., Washington, DC 20219.
Re: Request for Preemption Determination or Order.
Dear Ms. Williams: On behalf of National City Bank, National
City Bank of Indiana and its operating subsidiaries First Franklin
Financial Corporation and National City Mortgage Co. we hereby
request the Office of the Comptroller of the Currency (``OCC'') to
issue a preemption determination or Order under 12 U.S.C. 371 that
the Georgia Fair Lending Act (``GFLA'') is preempted by federal law
and regulations, specifically 12 U.S.C. 24 (Seventh), 371 and 484
and 12 CFR 34.1(b), 34.3, 34.4, 7.4002 and 7.4006 as it relates to a
national bank and its operating subsidiaries in the exercise of
their federally granted real estate lending powers.
I. Background
A. The Requesting Parties
National City Bank and National City Bank of Indiana both are
national banks, chartered, regulated, and supervised by the OCC.
National City Mortgage Co. and First Franklin Financial Corporation
are wholly owned operating subsidiaries of National City Bank of
Indiana and are similarly regulated and supervised by the OCC.
National City Bank originates in its own name and funds home
equity loans and lines of credit on a nationwide basis. National
City Mortgage Co. originates in its own name and funds first and
second mortgage loans throughout the United States for the purpose
of financing and refinancing the acquisition and construction of
real property consisting of one to four family residential
dwellings. First Franklin Financial Corporation originates in its
own name and funds first and second mortgage loans that enable
borrowers to acquire and refinance one to four family residential
real property. In this request, National City Bank, National City
Mortgage Co. and First Franklin Financial Corporation are
collectively referred to as ``National City.'' National City
receives loan applications from third party mortgage brokers, and
those mortgage brokers perform many services resulting in the
origination of the loans and lines of credit by National City in its
own name.
B. The Georgia Fair Lending Act
The GFLA became effective on October 1, 2002. In the enactment
of GFLA the Georgia Legislature was attempting to address abuses
[[Page 8962]]
it perceived in the marketplace that disadvantaged persons who may
have impaired credit or were unfamiliar with real estate lending
procedures and terms. There may be a legitimate state purpose for
regulation of lending practices which are otherwise unsupervised.
However, that purpose has no applicability to national banks and
their operating subsidiaries, which are subject to comprehensive
regulation and supervision by the OCC as required by federal law.
GFLA restricts national banks and their operating subsidiaries'
ability to originate mortgage loans in the state of Georgia, set
interest rates, fees and credit terms, establish disclosures and
utilize the services of third party mortgage brokers in the
origination process. GFLA applies to all consumer-purpose loans and
lines of credit secured by borrower-occupied one to four family
residential property within the conforming loan limit set by FNMA
for a single-family dwelling except reverse mortgages, bridge loans
and loans which are also secured by personal property (``Home
Loan''). Certain of GFLA's restrictions apply to all Home Loans.
Other limitations apply to one or both of the two sub-categories of
Home Loans created by GFLA as it was originally enacted: Covered
Home Loans and High Cost Home Loans. Whether a Home Loan fits into
these categories depends on the loan's interest rate and fees and
charges. The fees and charges which cause a Home Loan to be
categorized as a Covered Home Loan or High Cost Home Loan include
the fees paid to a third party mortgage broker.
GFLA establishes specific and burdensome limitations on
mortgage-secured loans and lines of credit that significantly
interfere with National City's ability to make these loans. All Home
Loans are subject to restrictions on the terms of credit and certain
loan related fees, including the prohibition of financing of credit
insurance, debt cancellation and suspension coverage, and limiting
late charges and prohibiting payoff and release fees. If the loan or
line of credit is a Covered Home Loan which refinances a Home Loan
which was closed within the previous five years, National City is
restricted from originating it unless the refinanced transaction
meets standards established by GFLA. If the loan or line of credit
is a High Cost Home Loan, GFLA does not permit National City to
originate it unless the borrower has received advance counseling
with respect to the advisability of the transaction from a third
party nonprofit organization. GFLA regulates National City's ability
to determine the borrower's ability to repay the High Cost Home
Loan. GFLA restricts, and in some cases prohibits, the imposition by
National City of certain credit terms or servicing fees on High Cost
Home Loans, including: prepayment penalties, balloon payments,
advance loan payments, acceleration in the lender's discretion,
negative amortization, post-default interest and fees to modify,
renew, amend or extend the loan or defer a payment. Any High Cost
Home Loan must contain a specific disclosure that it is subject to
special rules, including purchaser and assignee liability, under
GFLA. Finally, GFLA imposes pre-foreclosure requirements.
GFLA currently creates strict assignee liability for all
subsequent holders of a home loan. GFLA provides a private right of
action for borrowers against lenders, mortgage brokers, assignees
and servicers for injunctive and declaratory relief as well as
actual damages, including incidental and consequential damages,
statutory damages equal to forfeiture of all interest or twice the
interest paid, punitive damages, attorneys' fees and costs. In
addition, the Georgia Attorney General, district attorneys, the
Commissioner of Banking and Finance and, with respect to the
insurance provisions, the Commissioner of Insurance has the
jurisdiction to enforce GFLA through their general state regulatory
powers and civil process. Criminal penalties are also available.
The uncapped investor liability caused Standard & Poors, Moody's
Investor Services and Fitch Ratings to cease rating any security
that includes GFLA-governed loans. As of February 4, 2003 Fitch
Ratings declined to rate Georgia Home Loans in RMBS pools. Fitch
ratings also announced that it was considering the impact of further
state and local predatory lending legislation on its ability to rate
transactions. As a result, the GFLA impairs National City's ability
to securitize or sell their loans on the secondary market.
In light of the recent pronouncements by the securities rating
agencies, the Georgia Legislature is considering amendments to GFLA
which could limit or eliminate liability for assignees and
purchasers, remove the category of Covered Loans and make other
substantive changes to the law. These proposed changes, if enacted,
will reduce the number of loans categorized as High Cost Home Loans
and might provide limited safe harbors for refinancings. However,
the proposed amendments would not affect the restrictions on loan
fees and terms for Home Loans and High Cost Home Loans and the
preconditions for originating a High Cost Home Loan. One proposal
would also restrict the refinancing of any Home Loan originated in
the previous five years unless the refinancing meets GFLA's
standards. Therefore, the proposed amendments do not obviate
National City or any other national banking organization's need for
a preemption determination.
C. Impact of GFLA on National City's Real Estate Lending in Georgia
The effect of GFLA is to limit National City's ability to
originate and to establish the terms of credit on residential real
estate loans and lines of credit, including loans or lines of credit
submitted by a third party mortgage broker. GFLA has significantly
impaired National City's ability to originate residential real
estate loans in Georgia.
In addition to preventing National City from exercising its
fundamental powers to engage in residential real estate transactions
and to incorporate credit terms that National City feels may be
necessary to lend in a safe and sound manner, GFLA has also
adversely affected the investor market for Georgia loans. The
restrictions imposed by GFLA have lead the Government Sponsored
Enterprises (``GSE's'') to limit the loans they will purchase from
National City and other originators, and Standard and Poors, Fitch
Ratings and Moody's Investor Service have publicly stated they will
not allow a GFLA governed loan in a rated structured financial
transaction. This is another example of how the GFLA adversely
affects National City's ability to sell or securitize loans.\20\
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\20\ We note that other states and localities have passed
similar restrictions that also adversely affect National City's real
estate lending.
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II. Reasons Supporting the Requested Preemption of GFLA
A. GFLA Is Preempted by Paramount Federal Law
National banks and their operating subsidiaries have broad
authority to originate and establish the terms and conditions of
mortgage loans, subject only to the paramount regulations and orders
established by the Office of the Comptroller of the Currency
(``OCC'').
Federal law may preempt state law (1) where Congress has
expressly preempted state law, (2) where Congress has occupied the
field the state seeks to regulate, and (3) where state law actually
conflicts with federal law. Schneidewind v. ANR Pipeline Co., 485
U.S. 293, 299-300 (1988). In applying the test put forth by the
United States Supreme Court in Barnett Bank, N.A. v. Nelson, 517
U.S. 25 (1996), 134 L. Ed.2d 237 to the facts here it is clear that
Congress provided national banks with a broad grant of powers under
12 U.S.C. 24 (Seventh) and a specifically broad grant of powers for
real estate lending pursuant to 12 U.S.C. 371. This grant of power
to permit real estate lending is the exact activity which GFLA
restricts. The State's prohibitions under GFLA ``stand as an
obstacle to the accomplishment'' of one of the federal statute's
purposes, Hines v. Davidowitz, 312 U.S. 52, 67, 85 L. Ed. 581, 61 S.
Ct. 399 (1941).
Twelve U.S.C. Sec. 371 occupies the field of mortgage lending
subject only to such regulations and orders as are adopted by the
OCC. The Supreme Court has recognized that state law generally
should not limit powers granted by Congress--
In using the word ``powers,'' the statute chooses a legal
concept that, in the context of national bank legislation, has a
history. That history is one of interpreting grants of both
enumerated and incidental ``powers'' to national banks as grants of
authority not normally limited by, but rather ordinarily preempting,
contrary state law. Barnet Bank v. Nelson, 517 U.S. 25 at 32 (1996).
See also Bank One v. Guttau, 190 F.3d 844, 847 (8th Cir. 1999).
The Supreme Court has held that federal law preempts not only
state laws that purport to prohibit a national bank from engaging in
an activity permissible under federal law but also state laws that
condition the exercise by a national bank of a federally authorized
activity.
[W]here Congress has not expressly conditioned the grant of
``power'' upon a grant of state permission, the Court has ordinarily
found that no such condition applies. In Franklin Nat. Bank, the
Court
[[Page 8963]]
made this point explicit. It held that Congress did not intend to
subject national banks' power to local restrictions because the
federal power-granting statute there in question contained `no
indication that Congress [so] intended* * * as it has done by
express language in several other instances.' Barnett, 517 U.S. at
34 (citations omitted; emphasis in original).
As was the case in Barnett, Congress placed no restrictions in
12 U.S.C. 371 on the ability to conduct real estate lending
activities other than by rules and/or regulations as may be
promulgated by the OCC. The OCC has done so by promulgating 12 CFR
34, which by its terms reserves no right to the states to regulate
in the area of real estate lending by a national bank or its
operating subsidiary. National City is of the opinion as supported
by the Supreme Court's decision in Barnett that the federal statute
governing the power of a national bank to lend creates a scheme of
federal law and regulation so pervasive as to make reasonable the
inference that Congress left no room for the States to supplement
it.
Therefore, a conflict between GFLA and federal law need not be
complete in order for federal law to have preemptive effect. If, as
here, the state law (GFLA) places limits on an unrestricted grant of
authority under federal law, the state law (GFLA) is preempted.
B. The Preemption Analysis Applicable to National Banks Applies
With Equal Force to National Bank Operating Subsidiaries
In section 121 of the Gramm Leach Bliley Act (``GLBA''),
Congress expressly acknowledged that national banks may own
subsidiaries that engage ``solely in activities that national banks
are permitted to engage in directly and are conducted subject to the
same terms and conditions that govern the conduct of such activities
by national banks.'' 12 U.S.C. 24 a(g)(3).
Consistent with section 121, the OCC regulations state that
``[a]n operating subsidiary conducts activities authorized under [12
CFR 5.34] pursuant to the same authorization, terms and conditions
that apply to the conduct of such activities by its parent national
bank. 12 CFR 5.34(e)(3); See also 12 CFR 7.4006.
National City's operating subsidiaries are conducting mortgage
lending and servicing activities as permitted for a national bank
pursuant to 12 U.S.C. 24(Seventh), 12 U.S.C. 371, and 12 CFR
5.34(e)(5)(v). As such, they are subject to federal law and States
do not have the right to limit the powers over a national bank or
its operating subsidiaries in the conduct of these real estate
lending activities, except where such authority is specifically
granted by federal law, which is not the case here. Like the Bank,
the operating subsidiaries are examined on a continuous basis by OCC
examiners specifically assigned to, and in most cases physically
present at, the facilities of the Banks and their operating
subsidiaries.
C. National Bank Real Estate Powers and Part 34 of the
Comptroller's Regulations
The National Bank Act's underlying objective is to create a
uniformly regulated national banking system. The National Bank Act
is a comprehensive statute which governs not only the internal
workings of national banks, but also their powers, and virtually all
aspects of their regulation is the exclusive responsibility of the
OCC. See OCC Unpublished Interpretive Letter dated September 5, 1989
(holding that a Wisconsin statute imposing notification filing and
fee requirements on lenders making certain consumer loans was
preempted for national banks); OCC Advisory Letter 2002-9. In
section 24 (Seventh) of the National Bank Act, 12 U.S.C. 24(Seventh)
Congress granted national banks the power to exercise, ``by its
board of directors or duly authorized officers or agents, * * * all
such incidental powers as shall be necessary to carry out the
business of banking; by discounting and negotiating promissory
notes, drafts, bills of exchange, and other evidences of debt; * * *
[and] by loaning money on personal security;* * * '' Congress
further specifically authorized national banks to engage in real
estate lending beginning with the Act of September 7, 1916. From
1916 to 1982, in the statutory predecessors to the present 12 U.S.C.
371, Congress gradually broadened the scope of national bank
authority to make real estate loans, culminating in the enactment of
the Garn-St. Germain Depository Institutions Act of 1982 (Garn-St.
Germain''). Prior to Garn-St. Germain, 12 U.S.C. 371 contained
specific provisions establishing maximum loan to value ratios,
amortization requirements, maximum loan maturity and aggregate
limits on the amount of real estate loans a national bank could make
or purchase. In Garn-St. Germain, Congress removed these limitations
entirely, and gave national banks unlimited power to engage in real
estate lending subject only to the regulations and orders
established by the OCC. Thus, the history of national bank power to
engage in real estate lending demonstrates Congressional intent to
occupy the field, and to replace Congressional control over the
terms of national banks' real estate lending with a complete
delegation of control to the OCC as the ultimate arbiter of the
national bank's exercise of those powers. Further, section 371 is an
illustration of the familiar maxim of statutory construction:
expressio unius est exclusio alterius; in that the specificity of
the grant of authority to engage in real estate lending leaves no
room for state law or regulation.
Currently, section 371 provides as follows:
Authorization to make real estate loans; orders, rules and
regulations of Comptroller of the Currency. Any national banking
association may make, arrange, purchase or sell loans or extension
of credit secured by liens on interests in real estate, subject to
section 18(o) of the Federal Deposit Insurance Act [12 USCS 1828(o)]
and such restrictions and requirements as the Comptroller of the
Currency may prescribe by regulation or order.\21\
\21\ 12 U.S.C. Sec. 1828(o) authorized the OCC to establish
uniform regulations for real estate secured extensions of credit. In
adopting such regulations, the OCC is required to consider: the risk
posed to the deposit insurance funds by real estate lending; the
need for safe and sound operation of the insured institutions; and
the availability of credit. The OCC is authorized to permit
differing standards among the types of real estate-secured loans, as
warranted by federal law, the risk to the federal deposit insurance
fund, and based on considerations of institutional safety and
soundness. Thus, Congress has instructed the OCC to exercise its
supervisory authority over real estate lending in support of
mandates found in federal law alone.
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The OCC fully implemented the authority granted by Garn-St.
Germain in 1983 by amending or removing the interpretive rulings
regarding real estate lending that had their origins in earlier
versions of 12 U.S.C. 371 and promulgated Part 34, which
comprehensively defines real estate lending by national banks. Part
34 recognizes that the forms and terms of national bank lending must
be determined by the management of national banks themselves, to
enable the banks to have the necessary flexibility to respond to
market conditions. OCC regulatory authority insures that national
banks do so prudently and in a safe and sound manner. Part 34 also
clarifies the scope of federal preemption of state laws that could
impact real estate lending activities by national banks.
The pertinent regulations provide:
Sec. 34.3 General rule
A national bank may make, arrange, purchase or sell loans or
extensions of credit, or interests therein, that are secured by
liens on, or interests in, real estate, subject to terms,
conditions, and limitations prescribed by the Comptroller of the
Currency by regulation or order.
Sec. 34.4 Applicability of State law
(a) Specific preemption. National banks may make real estate
loans under 12 U.S.C. 371 and Sec. 34.3 without regard to state law
limitations concerning:
(1) The amount of a loan in relation to the appraisal value of
the real estate;
(2) The schedule for the repayment of principal and interest;
(3) The term to maturity of the loan;
(4) The aggregate amount of funds that may be loaned upon the
security of real estate; and
(5) The covenants and restrictions that must be contained in a
lease to qualify the leasehold as acceptable security for a real
estate loan.
(b) General standards. The OCC will apply recognized principles
of Federal preemption in considering whether State laws apply to
other real estate lending activities of national banks.
The provisions of GFLA which fall within the scope of 12 CFR
34.4(a)'s specific state law preemptions fall without need for
further analysis. Other provisions of GFLA can be analyzed under 12
CFR 34.4(b). OCC regulations specifically provide that the
provisions of 12 CFR 34.4 are applicable to both national banks and
their operating subsidiaries. See 12 CFR 34.1(b).
1. Provisions of GFLA Which Are Preempted Under 12 CFR 34.4(a)
Taken together, the provisions of 12 CFR 34.4(a)(1)-(4) which
remove any limits on loan to value ratios, amortization
requirements, maturity requirements and aggregate loan limits
preempt state laws
[[Page 8964]]
which impair a national bank or its operating subsidiary's ability
to make any real estate-secured loan. Three aspects of GFLA run
afoul of this preemption; the restrictions on a national bank's
ability to refinance certain Home Loans made in the previous five
years; the prohibition on making a High Cost Home Loan unless the
borrower has first received counseling from a third party regarding
the advisability of the transaction; and the prohibition on making a
High Cost Home Loan unless the borrower meets GFLA's standards as to
his or her ability to repay the loan. These restrictions not only
impair National City's ability to determine the aggregate amount of
loans it will originate in Georgia, they also impact loan to value
ratios, amortization requirements and determination of loan
maturity.
GFLA's prohibition of balloon payments, negative amortization
and advance payments from the loan proceeds are specifically
preempted under 12 CFR 34.4(a)(2), and 12 CFR 34.4(a)(3) preempts
GFLA's prohibition of a loan term that prevents the lender from
accelerating a High Cost Home Loan in the exercise of its
discretion. See OCC Unpublished Interpretive Letter dated December
8, 1983 (preempting a Massachusetts law restricting balloon and
demand payment terms) and OCC Unpublished Interpretive Letter dated
May 9, 1988 (national banks are not required to amortize real estate
loans and contrary state laws are preempted). The OCC has also held
that all state law disclosure requirements for real estate secured
loans are preempted. See OCC Unpublished Interpretive Letter dated
March 30, 1988.
2. Provisions of GFLA Which Are Preempted Under 12 CFR 34.4(b)
The five areas delineated in 12 CFR 34.4(a) are not the
exclusive areas where federal law preempts state laws affecting
national bank real estate lending activities. 61 FR 11294 (March 20,
1996). Those provisions of the GFLA that are not already preempted
under 12 CFR 34.4(a) are preempted under 12 CFR 34.4(b) either
because they are inconsistent with the comprehensive authority
granted to the OCC under section 371 to regulate the real estate
lending activities of national banks or applying the conflict
analysis in Barnett. With regard to the latter analysis, the
provisions of GFLA which prohibit the financing of credit insurance,
debt cancellation or suspension coverage, limit late payment charges
and prohibit payoff and release fees for Home Loans and restrict or
prohibit prepayment penalties, post-default interest and fees for
modification, extension or deferral of payments for High Cost Home
Loans would seem to ``stand as an obstacle to the accomplishment''
of one of the federal statute's purpose--that being the
authorization to make real estate loans subject only to such
restrictions and regulations as the OCC may prescribe. See Barnett
517 U.S. 25, at 31; and 12 U.S.C. Sec. 1828(o). These provisions
are an impermissible attempt by the state of Georgia to condition
the exercise of national bank lending powers which are authorized by
federal law. Bank of America, National Trust & Sav. Asso. v. Lima,
103 F. Supp. 916 (D. Mass. 1952). GFLA's compliance provisions
include the potential threat of litigation including uncapped
damages and the application of the foreclosure provisions. These
aspects of GFLA not only have more than an incidental chilling
affect on the operations of national banks and their operating
subsidiaries, but the compliance scheme, which includes enforcement
by state regulators, directly conflicts with the exclusive grant of
visitorial power to the OCC in 12 U.S.C. 484. See OCC Advisory
Letter 2002-9.
D. Preemption of GFLA's Restrictions on the Use of Mortgage Brokers
in the Loan Origination Process
12 U.S.C. 24 (Seventh) and 12 CFR 7.1004 permit a national bank
to use third party services in the organization process; this is
restricted by the limitations contained in GFLA as a whole and
through its impact on broker compensation.
Section 24(Seventh) specifically authorizes national banks to
make loans. Section 24(Seventh) also authorizes national banks to
engage in the more general ``business of banking'' and activities
incidental thereto. The Supreme Court has expressly held that the
``business of banking'' is not limited to the enumerated powers in
section 24(Seventh) and that the Comptroller therefore has
discretion to authorize activities beyond those specifically
enumerated. See NationsBank of North Carolina, N.A. v. Variable
Annuity Life Ins. Corp., 513 U.S. 251, 258, n.2 (1995). An activity
will be deemed ``incidental'' to the business of banking if it is
``convenient or useful in connection with the performance of'' a
power authorized under federal law. Arnold Tours, Inc. v. Camp, 472
F.2d 427, 432 (1st Cir. 1972).
The authority of national banks under section 24(Seventh)
permits a national bank to use the services of agents and other
third parties in connection with a bank's lending business. Federal
banking regulations specifically provide that a national bank may
``use the services of, and compensate persons not employed by, the
bank for originating loans''. 12 CFR 7.1004(a). Likewise, the
regulations permit national banks to utilize the services of third
parties to disburse loan proceeds. 12 CFR 7.1003(b). These agents
may undertake these activities at sites that are neither the main
office nor a branch office of the bank provided the requirements of
those regulations are satisfied. 12 CFR 7.1003(b), 7.1004(b). This
authority applies equally to an operating subsidiary of a national
bank. 12 CFR 7.1004(b).
Therefore, the provisions of GFLA which have the effect of
denying national banks and their operating subsidiaries from being
able to use third party mortgage brokers and compensating them for
the services they provide as permitted by federal law must be
preempted.
For the foregoing reasons, National City requests that the OCC
issue a determination, and/or an order pursuant to 12 U.S.C. 371,
that GFLA is preempted as it applies to a national bank and its
operating subsidiaries, and further restate the long held position
of the OCC with respect to the permitted use of third parties to
facilitate the making of real estate loans in Georgia and elsewhere.
Very truly yours,
Thomas A. Plant.
TAP/gs
[FR Doc. 03-4507 Filed 2-25-03; 8:45 am]
BILLING CODE 4813-33-P