So You've Been Preempted-What Are You Going to Do Now?: Solutions for States Following Federal Preemption of State Predatory Lending Statutes

Brigham Young University Law Review, 2004 by Childs, Christopher R

In addition to the social problems predatory lending causes, predatory lending practices and the regulatory responses they have elicited have created market disruptions that may counteract efforts to increase home ownership by decreasing the availability of credit. In response to state and local regulations that impose restrictions on high-cost home loans and attempt to stop abusive practices, some lenders have withdrawn from the secondary market where securitized home loans are sold and which provides the main source of funding for the home mortgage market.38 For instance, in response to the enactment of Georgia's initial Fair Lending Act, which prohibited high-cost loans and imposed liability on lenders that made such loans and on those that purchased them, Moody's Investors Service concluded that "including GFLA-covered loans in securitizations was too risky, causing lenders to scale back loans in the state and leading issuers to remove Georgia loans from securitizations."39 Standard and Poor's also announced that it would no longer rate mortgage-backed securities that included Georgia mortgage loans.40 Government-sponsored entities Fannie Mae and Freddie Mac, both major purchasers of securitized loans and an important capital source for the credit markets, have also taken measures aimed at reducing the possibility of purchasing abusive loans and have refused to purchase loans that are considered high-cost based upon federal standards.41

III. FEDERAL PIIEEMPTION OF THE GFLA AND OTHER STATE LAWS: THE DOOR Is OPEN

Although both federal and state regulators and legislators have taken aim at predatory practices and attempted to stop them through various regulatory devices, controversy still exists about who should regulate such practices and to what extent.42 Federal agencies, particularly the OCC and the OTS,43 have expressed concern that state predatory lending regulation interferes with the ability of national financial institutions to make real estate loans and have issued determinations that certain state predatory lending laws, notably the GFLA, do not apply to nationally chartered financial institutions.44 State and local policymakers, on the other hand, insist that federal laws and regulations are not strict enough and have enacted new laws and regulations to address the problem.45 sections A and B of this Part discuss the scope of the OCC and OTS preemption decisions, respectively, demonstrating that state predatory lending legislation similar to that enacted by Georgia can no longer address the predatory lending problem effectively. section C then outlines the reasons why exclusive federal regulation in this area would not be sufficient to stop the predatory lending problem and why, therefore, states should be allowed to regulate in the ways suggested in Part IV.46

A. The OCC's Preemption of the GFLA

In spite of states' concerns and desire to regulate in this area, the OCC has become increasingly unwilling to allow state predatory lending laws to operate against federally chartered banks. Notably, the OCC recently released a preemption order and determination that the GFLA does not apply to nationally chartered banks or their subsidiaries that operate within Georgia.47