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Banks: State Laws Not for Us

posted by Elizabeth Warren

Just when you think the mortgage mess can't get any worse, the banks come up with a new idea: They shouldn't have to obey state law when they foreclose on someone's home. 

Pre-emption has been a gravy train for the national banks, insulating their credit card business from state laws. Some banks now want another ride on the pre-emption train, claiming that they shouldn't have to follow local foreclosure laws when they take people's homes.

Tomorrow Congressmen Brad Miller (D, NC) and Steve LaTourette (R, OH) will introduce HR 5380 to make it clear that the banks have to follow the state law foreclosure laws, just like they always have. Amazingly, this is expected to be a close vote. 

HR 5380 is a small, but smart piece of legislation.  It says that if the states want to pass laws to deal with the current foreclosure crisis, then they are free to do so.  In other words, this bill says that Congress may not be ready to fix the crisis, but it will at least stay out of the way so that the states can do so. 

If banks don't like the state laws, they remain free to fight them in the state legislatures or the state courts.  They can even make constitutional arguments about takings.  But congressmen Miller and LaTourette say they can't claim that Congress gave them a free pass.

Since the founding of this country, foreclosure laws have been the special province of the state.  In the same way that they set up the basic rules of property law and property transfer, states decide the terms on which people could be thrown out of their homes or off their farms by the mortgage lender. There are no federal foreclosure laws.  Any mortgage holder--including a national bank or thrift--must abide by the terms of the state's foreclosure laws.   

But in the past few weeks, national banks have started making a new argument:  state laws are pre-empted whenever a national bank holds the mortgage, so the states can't make them follow the local rules. Pre-emption has been used successfully by the credit card companies to fight off state regulation, so now the banks want to escape local restrictions on foreclosure as well.

The scope of this argument is stunning.  Because there is no federal foreclosure law, would the banks be free to do whatever they wanted?  Could they simply order families out of their homes?  Would federally-charted banks start buying up troubled loans from other banks, then doing their own vigilante expulsions?

And if the argument works here, where else does it work?  Are the banks free to flaunt all state laws?

Congress has not acted swiftly to help homeowners.  The bankruptcy amendments that would provide real relief to the most troubled families is stalled.  But here's a step Congress can take quickly: They can tell the banks that the federal pre-emption gravy train is not taking on any new passengers. 


Answers to all your rhetorical questions? Yes they would; yes they could; yes they will; every where a large bank wants to stomp on a customer in a less-powerful situation (see: arbitration, contract terms and who can change what, etc); yes they believe they are.

Elizabeth, I really don't have any quarrel with one word of what you say, but for perspective, may I suggest that mortgage law has already been largely federalized, via FNMA and GNMA--I.e., for a generation now, if Fanny and Freddie wouldn't buy, there was no point in writing it. This doesn't go to e.g., anti deficiency rules or compulsory reinstatement rules, but it covers a lot of the basics.

This is interesting that preemption may apply to foreclosures too. One of the reasons you see so many mortgage brokers against many new laws and regulations is this very issue! What is often lost in translation is that many states are passing anti-predatory lending laws that only apply to local mortgage brokers but exempt federally chartered banks due to preemption. The brokers have to jump through all kinds of licensing hoops, have restrictions on mortgage products, and all kinds of extra headaches yet the big federally chartered banks do have to follow any of it. See Waters vs Wachovia at the Supreme Court. It is this kind of disparity that has the industry as a whole up in arms regarding new regulation.

Buce--while the substantive terms of many mortgages are effectively dictated by what Fannie/Freddie will buy, Fannie and Freddie have been forced to relax their standard to compete with private conduit securitizations. Moreover, they have only very small presences in subprime.

Irrespective, Fannie/Freddie conforming terms not only don't affect deficiency rules or reinstatement rules; they simply don't touch on the question of preemption of state law.

Dear Dr. Warren -

Hasn't the Supreme Court already ruled that national bank subsidiaries are not subject to state lending laws - including, I would suppose, foreclosure?

See: http://www.washingtonpost.com/wp-dyn/content/article/2007/04/17/AR2007041700611.html

I think the ruling represents a terrible trampling of states rights and is very likely going to be disastrous for consumers. We've already seen the federal Congress show its willingness to sell out consumers in the 2005 bankruptcy debacle. It's not that state legislatures can't be bought - it's just tougher to make 50 leg bodies stay bought instead of just one.

But, in light of this ruling, how have Massachusetts (May 1) and New York (today) been able to declare foreclosure moratoriums?

Appreciate an education on this from anyone.

Federal preemption by national banks is spelled out in OCC regulations. Specifically, 12 cfr 34.4(b) says that state laws that pertain to the(5) right to collect debts and (6) the acquisition and transfer or real property are not preempted, at least to the extent that they only "incidentally" affect the right of a national bank power (e.g. real estate lending).

These are laws that do not attempt to regulate the manner or content of national banks' real estate lending, but that instead form the legal infrastructure that makes it practicable to exercise a permissible federal power.

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