Carla J. Cerniglia, Senior Compliance Specialist
New York State Credit Union League, Inc.
19 British American Blvd.
Latham, NY 12110
Re: Applicability of State Lending Regulation to Federal Credit Unions.
Dear Ms. Cerniglia:
The purpose of this letter is to supplement a previous letter we sent to you on the question of the extent to which NCUA’s lending regulation preempts a New York regulation intended to curb abuses in high cost mortgage loans. 3 NYCRR Part 41; 12 C.F.R. §701.21.
Specifically, we want to draw your attention to the relationship between the state regulation and another federal law, the Truth in Lending Act. In addition, we want to note the NCUA’s support for state regulatory efforts in the area of predatory lending and highlight our involvement in efforts to combat predatory lending.
NCUA has focused on the issue of predatory mortgage lending in several ways. On December 16, 1999, the NCUA Board adopted a resolution to work on a cooperative basis with the National Association of State Credit Union Supervisors (NASCUS) on predatory mortgage lending practices. NCUA senior staff members have met with the NASCUS task force on predatory mortgage lending to discuss NASCUS data gathering efforts and the coordination of state and federal regulatory efforts. Also, in June 1999, NCUA issued a Letter to Credit Unions, 99-CU-05, which, while encouraging FCUs to make risk-based loans, specifically cautions that pricing differences must be justified based on risk or credit unions face heightened compliance and reputation risks. In addition, NCUA is a member of an interagency task force, with representatives from all the federal financial institution regulators, that has been working for several months on a policy statement on predatory lending.
NCUA’s lending regulation does not preempt state laws that affect aspects of credit transactions that are primarily regulated by other federal laws or regulations. Our regulation specifically provides that, in those cases, preemption is determined under the standards provided by the other relevant federal law. 12 C.F.R. §701.21(b)(3).
The Home Ownership and Equity Protection Act (HOEPA), an amendment to the Truth in Lending Act, 15 U.S.C. §1601 et seq., governs certain closed-end home mortgages. In comparison, the definition of a high cost home loan under the New York regulation encompasses a broader scope of mortgage loans and is triggered at lower thresholds than those in HOEPA. 3 NYCRR §41.1(e). HOEPA does not restrict states from adopting laws that provide greater consumer protections for loans that are covered under HOEPA. 15 U.S.C. §1610(b). Under HOEPA, a creditor must comply with any state law governing HOEPA loans to the extent it is not inconsistent with HOEPA. 12 C.F.R. §226.28(a)(1). Thus, FCUs are also subject to state law governing HOEPA loans to the extent the law is not inconsistent with HOEPA.
Reviewing the New York regulation in light of HOEPA, we believe that FCUs are subject to provisions such as the state regulation’s prohibitions regarding negative amortizations, increased interest rates, advance payments and certain lending practices. 3 NYCRR §§41.2(c), .2(d), .2(f), .3(b), .3(e). These provisions track HOEPA and its implementing regulation, Regulation Z, issued by the Federal Reserve Board (FRB). We note that a determination as to whether state law is inconsistent with HOEPA, however, falls within the purview of FRB. A creditor, state or other interested party may submit a request to the FRB for a determination that a state law is inconsistent or substantially the same as TILA. 12 C.F.R. §226.28, Appendix A to Part 226.
Finally, although we conclude that our lending regulation preempts some provisions of New York’s regulation, we want to highlight that the Federal Credit Union Act (FCUA) and our lending regulation contain significant consumer protections for all member loans, not only those that are real estate secured. FCUs are subject to an 18 percent interest rate ceiling. 12 U.S.C. §1757(5)(A)(vi); 12 C.F.R. §701.21(c)(7)(ii)(B). Additionally, unlike HOEPA or the New York regulation, the FCUA strictly prohibits FCUs from charging prepayment penalties. 12 U.S.C. §1757(5)(A)(viii).
We hope that you find this information helpful.
Sheila A. Albin
Associate General Counsel