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

1. Background

The GFLA was enacted in 2002 as Georgia's bid to stop predatory lending, which Georgia legislators perceived to be an increasing problem.48 It prohibits the financing of single premium credit accident, health, or life insurance,49 places limitations on late payment charges and fees,50 prohibits "flipping" and provides for damages for victims of such practices,51 and places other substantial limitations on loans that are defined by the act as "high-cost."52

In response to the GFLA's restrictions, National City Bank, a nationally chartered bank incorporated in Indiana that was an active lender in Georgia, sought a determination from the OCC that the GFLA did not apply to it or its operating subsidiaries.33 In its request, National City Bank asserted "that the GFLA is preempted under various provisions of federal law and that, accordingly, the OCC should conclude that the Georgia law does not apply to it."54 After notice to the public and an opportunity for comment on the issue, the OCC handed down an order which concluded that the substantive provisions of the GFLA do not apply to any nationally chartered banking institution operating within Georgia or any subsidiary of such a nationally chartered bank.55

2. Rationale for the OCC's decision

The OCC found authority to issue the preemption order from 12 U.S.C. § 371(a), which gives national banks the ability to "make, arrange, purchase or sell loans or extensions of credit secured by liens on interests in real estate, subject to section 1828(o) of [the Federal Deposit Insurance Act] and such restrictions and requirements as the Comptroller of the Currency may prescribe by regulation or order."56 The OCC interpreted this grant of power very broadly, stating that "[i]n no respect does the statute express or imply that the power granted is limited, to some variable degree, by application of fifty different state laws."57 Federal preemption principles and the Supremacy Clause do not allow states to "modify a Congressional grant of power to national banks by limiting, conditioning, or otherwise impermissibly affecting a national bank's exercise of that power."58

3. Scope of the OCC's determination

Based on regulations that the OCC had already properly enacted pursuant to § 371, the OCC reasoned further that various types of state rules regulating national bank real estate lending do not apply to national banks. Specifically, 12 C.F.R. § 34.4(a) lists five areas of state laws and limitations that do not apply to national banks in the area of mortgage lending, two of which covered GFLA provisions.59 First, under § 34.4(a)(2),60 GFLA restrictions on balloon payments, negative amortization provisions, advance payment provisions, and provisions against late fees, regulation of prepayment fees, and provisions limiting default rates of interest were all preempted and not applicable to national banks.61 second, § 34.4(a)(3)62 expressly preempted GFLA provisions governing limitations on prepayment fees, prohibitions on the ability of a lender to accelerate the loan absent default by the borrower, and provisions giving borrowers a right to cure any default that occurred over the term of the loan.63