Ninth Circuit Upholds Preemption for Banks, Thrifts

Reprinted from the CCH Federal Banking Law Reporter.

The U.S. Court of Appeals for the Ninth Circuit has affirmed two separate lower court decisions that California state consumer protection laws were preempted by federal laws and regulations. In one case, consumers asserted that a federal savings association had violated state law by misrepresenting that a mortgage loan lock-in fee was not refundable if the loan was rescinded, while in the other consumers attacked a national bank's failure to provide state law-required disclosures for convenience checks. Separate three-judge panels of the appellate court ruled that the state laws could not be applied to federally chartered and regulated financial institutions.

In each case, the panel began by noting that the ordinary presumption against the preemption of state laws did not apply. There was a long history of federal regulation of federal savings associations by the Home Owners Loan Act (HOLA), one panel noted, and that regulation was so pervasive that it occupied the entire field of law. The implementing Office of Thrift Supervision regulations explicitly asserted that the entire field of regulation was preempted, the panel continued. The panel addressing the national bank case observed that the National Bank Act (NBA) explicitly granted banks the power to lend money on personal security—which is what convenience checks did—and such a grant of power would not be limited by state law.

Home Owners Loan Act

The consumers suing the federal thrift had applied for and been granted mortgage loans that were covered by the Truth in Lending Act's three-day right of rescission. However, when they rescinded the loans, the lender failed to return the $400 fee they had paid to lock in their interest rates. The consumers asserted that TILA required the fee to be repaid and that the lender's failure to do so, as well as its misrepresentation that it was not required to do so, violated California state laws against unfair or deceptive conduct and misrepresentations in advertising and disclosures.

HOLA and OTS regulations preempted the consumers' false advertising claim, the court determined. The claim related to the thrift's disclosures and advertisements, and the OTS regulations explicitly preempted state laws on those subjects.

The claim that the thrift violated state unfair competition law by misrepresenting that the lock-in fee was not refundable also was preempted, the court said. That claim was covered by the OTS regulations on disclosures and advertisements and also by the regulation on loan-related fees.

The TILA state law savings clause did not shield the state laws from being preempted by HOLA, the court also decided. The TILA savings clause applied only to preemption by TILA, not by other federal laws. It was irrelevant that the conduct complained of would have been a TILA violation, the court said.

National Bank Act

The consumers suing the national bank complained that the bank had sent them convenience checks—hecks allowing them to draw on their credit card accounts—without making state law-required disclosures about the effect of using the checks or the resulting interest rates and fees. They asserted that this was an unlawful business practice, deceptive or misleading advertising and an unfair business practice under state law.

The application to national banks of the state law on disclosure requirements was preempted by the NBA, the court said. The NBA explicitly granted banks the power to lend money on personal security and gave no indication that the power could be affected by state law. The state laws on unfair or deceptive acts also could not be applied, the court said. Even if the consumers' claim was not based on the state disclosure law, which was preempted, the underlying duty the consumers claimed to have been violated was based on that law.

Silvas v. E*Trade Mortgage Corp. (9thCir)