Courtesy of the National Consumer Law Center
April 28, 2010

The following are examples of state laws that have been preempted by federal bank regulations.  Section 1044 of S. 3217, the Restoring American Financial Stability Act, allows bank regulators to continue preempting state laws but requires them to assess whether a state law or one with substantially equivalent terms significantly interferes with the business of banking and whether the law falls in a gap in federal protections.

Predatory lending involving failure to disclose negative amortization and immediate rate increase. Mortgage had 1.5% initial rate. Payment schedule attached to the note indicated payments fixed for three to five years based on the 1.5% rate. The bank did not disclose that the interest rate would shoot up in 30 days and the loan would immediately began negatively amortizing and could not be paid off by payments based on the schedule. The loan had a prepayment penalty and could not be refinanced. The court held that a state law prohibiting unfair, deceptive and fraudulent practices was preempted by OTS regulations. Nava v. VirtualBank, 2008 WL 2873406 (E.D. Cal. July 17, 2008).

Credit card due dates. State law permitting a party to a contract to perform an act on the next business day after a holiday is preempted as to credit card due dates. Miller v. Bank of Amer., 88 Cal. Rptr. 3d 723 (Cal. Ct. App. 2009).

Ability to pay mortgage loans. Many states passed laws requiring mortgage lenders to consider ability to pay but were unable to enforce those laws against banks like IndyMac and Washington Mutual. In 2006, the peak year of toxic lending, from 32% to 50% of toxic loans, depending on the type, were made by institutions who were immune from state law due to preemption, and that share was growing.

Deception in mortgage lending. “[W]e were largely powerless to enforce those laws [we had] against national banks and their lending affiliates and subsidiaries due to the aggressive stance federal regulators took to preempt state law, even with respect to discriminatory lending and deceptive advertising.” Republican Colorado Attorney General John Suthers (January 14, 2010). Claims that Wachovia misstated the true costs and terms of the mortgages were preempted. Fultz v. World Sav. & Loan Ass’n, 571 F. Supp. 2d 1195 (W.D. Wash. 2008).

Limits on prepayment penalties. OTS regulation preempts state limit on prepayment penalty. Stoneking v. Bank of Am., 43 P.3d 1089 (N.M. Ct. App. 20020)

Fraud by appraisers. Two appraisal companies conspired with bank to inflate home appraisals so that loans could be sold at higher prices. The bank was dismissed after the FDIC takeover. Claims against the appraisers were preempted. Spears v. Washington Mutual, Inc., 2009 WL 605835 (N.D. Cal. Mar. 9, 2009).

False advertising. Claims under Missouri Merchandising Practices Act by plaintiff who enrolled in an accelerated ownership plan and was not told that mortgage payments withdrawn every 2 weeks would only be paid every 4 weeks were preempted. Weiss v. Wells Fargo Bank, 2008 WL 2620886 (W.D. Mo. July 1, 2008).