Will BoA Claim Preemption?

Today (July 1) is supposed to be the closing date for the Bank of America/Countrywide merger. In recent weeks, the states of Illinois, New York, and Florida have sued Countrywide for various wrongs committed to the citizens of their states. People are lining up to sue Countrywide. As the deal has been going through the approval processes, numerous commentators have wondered about why Bank of America is willing to expose itself to such liability.

Once the merger goes through, I wonder whether Bank of America is going to claim these lawsuits are preempted by the regulations of the Office of the Comptroller of the Currency (OCC). This obscure federal agency has regulatory authority over national banks and has issued regulations exempting national banks like Bank of America from state laws and regulations governing lending. To legal types, this concept is known as "preemption," and the OCC regulations were upheld by the United States Supreme Court as we discussed here and here.

Countrywide did some but not all of its lending through a bank, called Countrywide Bank, that was a national bank and then converted to a federal savings bank (FSB). FSBs are regulated by the Office of Thrift Supervision, which does not have broad preemptive regulations like the OCC.  Thus, the protection that the preemption doctrine would provide Countrywide is full of holes. BoA would have a stronger hand with the OCC, a regulatory agency that has a lender-friendly track record.

Yes, the lawsuits all allege abusive lending practices by Countrywide that predate Bank of America's acquisition, but BoA might point out that the purpose of the OCC preemptive regulation is to prevent national banks from being subject to diverse state regulators. It does not matter, BoA might say, when the violations occurred. Under this reasoning, the OCC is the only regulator that can touch the BoA empire which would now include Countrywide. Any state lawsuits would have to be dismissed. (For the bankruptcy mavens out there who might be wondering about the power of the U.S. Trustee versus the OCC, think about which agency might win a fight over the primary jurisdiction doctrine.)

Is this scenario farfetched? The timing of the state lawsuits, just before the deal closed, suggests to me that perhaps the state attorneys general were similarly concerned about a preemption claim.

Comments

[william]

Did Countrywide hold a gun to these people's heads?

Millions of morons who had no business taking out loans in the first place now want to sue the lenders for their own mistakes.

What a country!

[AMC]

Yeah, what a country.

http://uk.reuters.com/article/ousiv/idUKN3044157620080701

Florida sues Countrywide over mortgages
Tue Jul 1, 2008 12:51am BST
By Jim Loney

* * * * * *

Underscoring the aggressiveness of its lending practices -- aimed at maximizing the company's profits regardless of credit risk -- the complaint said Countrywide's own underwriters were "threatened with termination for attempting to verify a borrower's ability to pay, or otherwise impeding loan approval."

It added managers were encouraged to approve subprime loan applications initially denied by underwriters who suspected fraud.

http://www.nytimes.com/2008/06/25/business/25mortgage.html?_r=2&ref=business&oref=slogin&oref=slogin

Illinois to Sue Countrywide

By GRETCHEN MORGENSON
Published: June 25, 2008

* * * * * *

The lawsuit, which is expected to be filed on Wednesday in Illinois state court, accused Countrywide and Mr. Mozilo of relaxing underwriting standards, structuring loans with risky features, and misleading consumers with hidden fees and fake marketing claims, like its heavily advertised “no closing costs loan.” Countrywide also created incentives for its employees and brokers to sell questionable loans by paying them more on such sales, the complaint said.

In reviewing one Illinois mortgage broker’s sales of Countrywide loans, the complaint said the “vast majority of the loans had inflated income, almost all without the borrower’s knowledge.”

* * * * * *

The Illinois complaint was derived from 111,000 pages of Countrywide documents and interviews with former employees. It paints a picture of a lending machine that was more concerned with volume of loans than quality.

For example, former employees told Illinois investigators that Countrywide’s pay structure encouraged them to make as many loans as they could; some reduced-documentation loans took as little as 30 minutes to underwrite, the complaint said.

The lawsuit cited Countrywide documents indicating that almost 60 percent of its borrowers in subprime adjustable rate mortgages requiring minimal payments in the early years, known as hybrid A.R.M.’s, would not have qualified at the full payment rate. Countrywide also acknowledged that almost 25 percent of the borrowers would not have qualified for any other mortgage product that it sold.

Even more surprising, Ms. Madigan said, was her office’s discovery of e-mail messages automatically sent by Countrywide to its borrowers offering complimentary loan reviews one year after they obtained their mortgages from the company.

“Happy Anniversary!” the e-mail messages stated. “Many home values skyrocketed over the past year. That means that you may have thousands of dollars of home equity to borrow from at rates much lower than most credit cards.”

[Mike Dillon]

So what would you have to say about this William?
http://www.ftc.gov/fairbanks

[Mike Dillon]

So what would you have to say about this William?
http://www.ftc.gov/fairbanks

[Adam Levitin]

The OCC is so frequently (and justifiably) the target of criticism for its preemption activities that OTS often slips by under the radar. In fact, the OTS has erogated to itself much broader preemptive authority than OCC. The OTS claims field preemption, something the OCC hasn't yet dared to do, and has not hesitated to flex this muscle to protect thrifts against state consumer protection regulation. Curiously, the OTS's claim of field preemption is not because _Congress_ passed a law that occupies the field of regulation of federal savings associations, but because the _OTS_ promulgated a regulation that announced it occupies the field. 12 C.F.R. Part 560.2(a) provides:

"Occupation of field. Pursuant to sections 4(a) and 5(a) of the HOLA, 12 U.S.C. 1463(a), 1464(a), OTS is authorized to promulgate regulations that preempt state laws affecting the operations of federal savings associations when deemed appropriate to facilitate the safe and sound operation of federal savings associations, to enable federal savings associations to conduct their operations in accordance with the best practices of thrift institutions in the United States, or to further other purposes of the HOLA. To enhance safety and soundness and to enable federal savings associations to conduct their operations in accordance with best practices (by efficiently delivering low-cost credit to the public free from undue regulatory duplication and burden), OTS hereby occupies the entire field of lending regulation for federal savings associations. OTS intends to give federal savings associations maximum flexibility to exercise their lending powers in accordance with a uniform federal scheme of regulation. Accordingly, federal savings associations may extend credit as authorized under federal law, including this part, without regard to state laws purporting to regulate or otherwise affect their credit activities, except to the extent provided in paragraph (c) of this section or §560.110 of this part. For purposes of this section, “state law” includes any state statute, regulation, ruling, order or judicial decision."

Sadly, the caselaw on OTS preemption never seriously addresses the question of whether the OTS (or any agency) can decide that it occupies the field and therefore grants itself preemptive authority over state law. To the extent that caselaw has touched on the topic, it has been through facile observations that federal regulations have the same preemptive effect as statutes--which is true, but doesn't go to the question of whether the regulations themselves are authorized. Hopefully we'll see a case sooner or later that puts OTS (and OCC) preemption by preamble squarely at issue. The Supreme Court had a chance to address this in Watters v. Wachovia, but didn't--perhaps because the outcome in that case would have been untenable if OCC authority were actually examined. On the other hand, perhaps the finding of preemption in Watters was a tacit blessing of preemption by preamble. Point is that the OCC isn't the banking regulator that aggressively exercises its preemptive muscle.

[Seth]

[ Millions of morons who had no business taking out loans in the first place now want to sue the lenders for their own mistakes. ]

How many of those "morons" went to the real estate agents and loan brokers asking professional advice? How many followed it, or ignored the 'wink wink' advice for caution. You can try to argue that individuals have no resource since the loan brokers/agents/whatever were never formally their agent and could legally give them bad advice which rewards themselves immediately, but -in aggregate- I think it's perfectly reasonable to the state to get involved and say that the behavior is unacceptable.

As an analogy, it's impossible to prove individual damage due to price collusions. How can anyone possibly know how much more they're paying, or that they couldn't find a better deal if they looked just one more day? But few non-libertarians would argue that the state shouldn't get involved in these cases.

(P.S., there's also the case where the terms of the loan were misrepresented to the buyer. Yes, we should all read all documents, but most aren't available until closing.)