OCC Preempts Georgia Predatory Lending Law, Proposes Preemption Clarifying Rule

WASHINGTON – Arguing that the Office of the Comptroller of the Currency “has no evidence that national banks are engaged in predatory lending practices,” Comptroller of the Currency John Hawke said the Georgia Fair Lending Act does not apply to national banks. At the same time, Hawke proposed a new regulation that would clarify what types of state laws do apply to national banks and which ones are preempted by federal law. The agency said the proposed regulation “establishes a strong anti-predatory lending standard that is aimed at keeping abusive practices out of the national banking system without denying low-income Americans and other subprime borrowers access to credit they need to improve their lives.” “It is a matter of constitution law and federal statute that the powers of national banks cannot be obstructed by state laws or regulation,” said Hawke. The OCC is actually the second federal agency to issue a preemption order against the Georgia law. The Office of Thrift Supervision made a similar announcement in January. Considered to be the toughest predatory lending law in the U.S., the Georgia Fair Lending Act (GAFLA) was signed in to law April 22, 2002 and became effective Oct. 1, 2002. In March 2003, Gov. Sonny Perdue signed S.B. 53 into law which amended GAFLA and became effective on his signing. “National banks’ authority to engage in real estate lending activities derives exclusively from Federal law. Under applicable Federal preemption principle.a state law may not modify a Congressional grant of power to national banks by limiting, conditioning, or otherwise impermissibly affecting a national bank’s exercise of that power,” the OCC wrote in its “Preemption Determination and Order.” “In recent years, the OCC has received numerous inquiries concerning the applicability of state law to national banks, and the extent to which state law applies to a national bank’s exercise of powers authorized by federal law has been the subject of litigation in different contexts. The number and variety of these questions reflect a need for clarification of the circumstances when state laws or regulations apply to activities and operations of national banks,” the OCC stated. The proposed rule would prohibit national banks from making loans they cannot reasonably expect to be repaid without recourse to the borrower’s collateral. It would apply the OCC’s predatory lending standard to all lending activities, including mortgages. “I firmly believe that we have found a better way to combat abusive lending practices, and I would invite state regulators to apply similar standards to the institutions they supervise,” said Hawke. In issuing its order concerning the Georgia law, the OCC responded to a request in February by National City Bank, National City Bank of Indiana, and their subsidiaries as to whether the Georgia law applied to national banks. Even before Hawke issued his latest order and proposed regulation, he said much of the Georgia law was already preempted under existing OCC regulations. For example, federal law already preempts the Georgia law’s provisions that limit or impose restrictions on the schedule for repayment of principal and interest or the term to maturity of a loan extended by a national bank. Federal law also allows national banks to conduct lawful activities through operating subsidiaries. Those activities are subject to the same terms and conditions that apply to the national bank. The OCC’s proposed rule addresses two parts of OCC’s regulations: * Part 34 states that state laws concerning repayment schedules or the term to maturity of a loan don’t apply to national banks. The proposed rule lays out examples of the types of state statutes the OCC or the courts have concluded would be preempted – licensing laws, laws that address the terms of credit, permissible rates of interest, escrow accounts, and disclosure and advertising. The proposal also lists examples of state laws that wouldn’t be preempted. * Part 7: deposit-taking and lending powers are enumerated in the federal statute that also grants national banks the broader power to engage in activities that are part of, or incidental to, the business of banking. The proposed rule includes several types of state laws that are preempted under federal law, and those that aren’t preempted A spokesman for Gov. Perdue said the governor was considering whether to sue the OCC to block the agency’s order. -