Edwin B. Wills, Senior Vice President
District of Columbia Credit Union League
333 John Carlyle Street, Suite 520
Alexandria, Virginia 22314
Re: Applicability of the District of Columbia (D.C.) Home Loan Protection Act of 2002 to Federal Credit Unions.
Dear Mr. Wills:
Chairman Dollar referred your January 27, 2003, letter to this office for a legal opinion on whether D.C.’s Home Loan Protection Act of 2002 (HLPA) applies to federal credit unions (FCUs). Our opinion is that this law is preempted because it purports to limit or affect the rates, terms of repayment and other conditions of loans and lines of credit that FCUs may offer to their members. Our opinion is that the District of Columbia may not require FCUs to comply with it.
HLPA is an anti-predatory lending law requiring certain disclosures and prohibiting certain terms and conditions in residentially secured loans. D.C. CODE ANN. §26.1151.01 et seq. (Lexis 2002). FCUs are already subject to the Home Ownership and Equity Protection Act (HOEPA), an amendment to Truth in Lending Act (TILA), which governs certain closed-end home mortgages but excludes “residential loans.” 12 C.F.R. §226.32(a). A “residential loan” is a loan in which a mortgage is created “in the consumer’s principal dwelling to finance the acquisition or initial construction of that dwelling.” 12 C.F.R. §226.2(a)(24).
The D.C. law, HLPA, applies to both open and closed-end home loans, but like HOEPA, excludes “residential loans.” D.C. CODE ANN. §26-1151.01(7)(A), (14)(B)(Lexis 2002). The definition of a covered loan under HLPA, because it includes open-end loans and is triggered at slightly lower thresholds, encompasses a broader scope of mortgage loans than those covered by HOEPA. In addition, HLPA places more conditions on lending than HOEPA by establishing certain prohibited practices and prescribing disclosure and filing requirements for loans within its scope.
NCUA’s lending regulation expressly preempts any state laws that would limit or affect lending rates, repayment terms or lending conditions by FCUs.1 12 C.F.R.
§701.21(b). Various provisions in HLPA are specifically identified in NCUA’s lending regulation as examples of the types of provisions our lending regulation preempts. For example, HLPA has provisions regarding the repayment ability of borrowers, D.C. CODE ANN. §26-1152.02, which could determine or affect the eligibility of borrowers. This is an example in our regulation of a lending condition. 12 C.F.R. §701.21(b)(1)(iii). Another example is HLPA’s provision specifically addressing payments in connection with home improvement contracts. D.C. CODE ANN. 26-1152.07. This falls within the category in our lending regulation of a state law directed at the purpose of a loan. 12 C.F.R. §701.21(b)(1)(iii)(A).
HLPA’s various restrictions and requirements are directed at “covered loans.”2 AS noted above, a covered loan is defined in terms of its rates, repayment terms or lending conditions. D.C. CODE ANN. §26-1151.01(7)(A), (14)(B). As such, an FCU must either change its rates or other terms and conditions of its lending or be subject to the requirements of HLPA. NCUA’s long-standing position is that state laws affecting rates, repayment terms or lending conditions are preempted.3 49 Fed. Reg. 30683, 30684 (August 1, 1984).
The NCUA defers to state law in the lending area only on limited issues specifically stated in its regulation. 12 C.F.R. §701.21(b)(2). In aspects of credit transactions primarily regulated by other federal law, NCUA will apply the preemption standards of the relevant federal law in determining whether state law will apply, except to those areas NCUA has specifically preempted in its own regulation, 12 C.F.R. §701.21(b)(1). As noted above, the provisions of HLPA fall within §701.21(b)(1) and are preempted.
TILA has a so-called “savings clause” that provides that a creditor must comply with any state law governing HOEPA loans to the extent the state law is not inconsistent with HOEPA. 12 C.F.R. §226.28(a)(1). In the past, NCUA interpreted this provision as requiring FCU compliance with a state law governing loans that are otherwise subject to HOEPA. GC 00-0827 (March 2, 2001).
Recent judicial interpretation has, however, limited the effect of the savings clause of TILA and other federal statutes on the preemption analysis under federal banking laws. Bank of America v. City & County of San Francisco, 309 F.3d 551, 565 (9th Cir. 2002); American Bankers Association v. State of California, 238 F.Supp. 1000 (E.D. Cal. 2002). The court in American Bankers Association stated that “there is no indication the savings clause reaches beyond TILA to control the preemption analysis applicable under any other federal laws, including the federal banking laws.” Id. at 1009. The court concluded that the TILA savings clause does not save the TILA credit card disclosure provisions from preemption by the FCUA. Id. Based on this, NCUA’s lending regulation preempts any state law, including one affecting aspects of lending primarily regulated by TILA, that regulates rates, terms of repayment and other conditions of loans and lines of credit. 12 C.F.R. §701.21(b)(1).
NCUA’s lending regulation specifically provides that the NCUA Board “retains exclusive examination and administrative enforcement jurisdiction over Federal credit unions.” 12 C.F.R. §701.21(b)(4). Only the NCUA and not, as stated in HLPA, the Mayor, has the authority to take enforcement actions, including the imposition of administrative penalties against FCUs. D.C. CODE ANN. §§26- 1153.01-.03. Section 26-1153.02, by its terms, only applies to lenders over which the Mayor has jurisdiction and, therefore, does not apply to FCUs. With respect to the other two enforcement provisions, as explained in the attached OGC legal opinion 02-0566, dated October 4, 2002, and as provided in NCUA’s regulations, if violations of state law occur and the matter cannot be resolved informally, the imposition of fines and penalties falls within NCUA’s enforcement jurisdiction. 12 C.F.R. §701.21(b)(4).
We note that HLPA specifically exempts federally-chartered banks, thrifts, trust companies and their subsidiaries from its requirements. D.C. CODE ANN. §26- 1151.01(7)(B). As explained in the attached letter from NCUA Chairman Dennis Dollar to Councilwoman Sharon Ambrose dated June 17, 2002, there is no legal or regulatory basis to treat credit unions differently than other federally chartered financial institutions.
Finally, although we conclude that our regulation preempts HLPA, we want to highlight that the Federal Credit Union Act, our regulations and TILA 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, like HLPA, the FCUA strictly prohibits FCUs from charging prepayment penalties. 12 U.S.C. §1757(5)(a)(viii).
We hope you find this information helpful.
Sheila A. Albin
Associate General Counsel
June 17, 2002
The Honorable Sharon Ambrose, Chairperson
Committee on Consumer and Regulatory Affairs
Council of the District of Columbia
1350 Pennsylvania Avenue, N.W., Room 102
Washington, DC 20004
Dear Ms. Ambrose:
As Chairman of the National Credit Union Administration (NCUA), I am compelled to challenge your statement in the attached letter to Lafayette Federal Credit Union that “credit unions are not as regulated as banks and their subsidiaries.” With all due respect, I must strongly disagree with your assertion. Federally chartered and insured credit unions are regulated to the same degree and in the same manner as banks, thrifts, trust companies and their subsidiaries, and should be treated the same as those institutions under the pending Home Loan Protection Act of 2002.
NCUA is an independent federal agency within the executive branch of the United States government that supervises and insures the accounts in over 6,500 federal credit unions and insures the accounts in over 4,000 state-chartered credit unions. The NCUA has a full-time, three-member board, appointed by the President of the United States and confirmed by the Senate.
NCUA is a member of the Federal Financial Institutions Examination Council (Council), an interagency body that prescribes uniform principles, standards, and report forms for the examination of all federally-insured financial institutions. The four other members of the Council are the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation (FDIC), the Office of the Comptroller of the Currency, and the Office of Thrift Supervision. We work to promote uniformity in the supervision of all federal financial institutions including banks, thrifts, trust companies and credit unions. This uniformity of supervision and examination evidences that federal credit unions are subject to the same rigorous regulatory scrutiny as other federal financial institutions.
For several years, the NCUA has been an active participant in a federal interagency task force, along with its sister agencies, addressing ways to combat predatory lending practices. Throughout this process, it has become abundantly clear that, not only are credit unions not part of the problem, but have been part of the solution because, as member-owned cooperatives, they offer a low cost credit alternative to consumers. Furthermore, federal credit unions are limited by the Federal Credit Union Act in the interest they may charge and are prohibited from charging prepayment penalties.
The U.S. Department of the Treasury recently completed the attached report entitled Comparing Credit Unions with Other Depository Institutions, dated January 2001 (Report). The Report contains a detailed comparison of the three types of depository institutions: credit unions, banks, and thrifts. The Report summary states:
Despite their relatively small size and their restricted fields of membership, federally insured credit unions operate under banking statutes and rules virtually identical to those applicable to banks and thrifts. Significant differences have existed in the past, but have been gradually disappearing. Recently, most of the remaining major regulatory differences between credit unions and other depository institutions were removed.
Report at 1. As discussed in the Report, credit union regulation affecting the protection and confidence of consumers and the safety and soundness of the financial operations is substantially identical to that of thrifts and banks. For example, NCUA's enforcement authority is virtually identical to that of the banking and thrift regulators. Report at 58-61. NCUA enforces consumer protection laws in the same manner as banking and thrift regulators, Report at 61-66, including the Truth in Lending Act, the Home Ownership and Equity Protection Act and the implementing regulations found in Regulation Z as noted in the attached letter from NCUA General Counsel Robert Fenner to you. NCUA also enforces other consumer protection laws including the Equal Credit Opportunity Act and the implementing regulations found in Regulation B, Home Mortgage Disclosure Act and the implementing regulations found in Regulation C, and the Truth in Savings Act and the implementing regulations found in Part 707 of NCUA regulations.
As the FDIC deposit insurance fund insures bank and thrift accounts, the NCUA-administered National Credit Union Share Insurance Fund (NCUSIF) insures credit union accounts up to $100,000. As with the FDIC deposit insurance fund, the NCUSIF is well-capitalized and is backed by the full faith and credit of the United States government. Credit union deposits fund the NCUSIF and not one tax dollar was lost during the financial institutions crisis of the late 1980s and early 1990s. Like banks and thrifts, federally chartered and insured credit unions are subject to regular safety and soundness examinations.
Credit unions are nonprofit, cooperative institutions whose mission includes service to those who are most in need of affordable financial services. Credit unions are uniquely positioned, and encouraged by NCUA’s Access Across America program, to provide affordable financial services to the nation’s and the District of Columbia’s underserved communities. Access Across America is NCUA’s re-statement of our commitment to seeing that progress continues and manifests itself in the lives of more Americans who need access to financial empowerment through credit union membership eligibility and the resulting access to low-cost financial services.
The District of Columbia’s almost seventy federal credit unions have assets in excess of three billion dollars and provide an important source of housing finance credit to residents of the District of Columbia. To treat credit unions less advantageously than other federal financial institutions in the pending legislation is, quite simply, without a legal or regulatory basis, overlooks the contribution and record of the District’s federal credit unions, and is a disservice to their members.
I would be happy to meet with you and make NCUA staff available to discuss this important issue further or provide any additional information you may need regarding the regulation of credit unions.
cc: William A. Brooks, President and CEO
Lafayette Federal Credit Union
1 NCUA’s lending regulation provides:
Section 701.21 is promulgated pursuant to the NCUA Board’s exclusive authority as set forth in Section 107(5) of the Federal Credit Union Act (12 U.S.C. §1757(5) to regulate the rates, terms of repayment and other conditions of Federal credit union loans and lines of credit (including credit cards) to members.
This exercise of the Board’s authority preempts any state law purporting to limit
- (i)(A) rates of interest and amounts of finance charges . . .
- (B) late charges; and
- (C) closing costs, application, origination, or other fees;
- (ii) terms of repayment, including . . .
- (A) the maturity of loans and lines of credit;
- (B) the amount, uniformity, and frequency of payments, including the accrual of interest if payments are insufficient to pay all interest due;
- (C) balloon payments; and
- (D) prepayment limits;
- (iii) conditions related to:
- (A) the amount of the loan or line of credit;
- (B) the purpose of the loan or line of credit;
- (C) the type or amount of security . . .
- (D) eligible borrowers; and
- (E) the imposition and enforcement of liens on the shares of borrowers and accommodation parties.
2 HLPA includes restrictions and requirements covering: disclosure requirements; prohibitions regarding repayment ability, financing, refinancing, call provisions and home improvement contracts; and limitations regarding balloon payment, negative amortization, advance payments, and due-on-demand clauses. D.C. CODE ANN. §§26-1152.02, 26-1152.03, 26-1152.04, 26- 1152.05, 26-1152.08, 26-1152.09, 26-1152.11, 25-1152.12, 26-1152.13, 26-1152.14, 26-1152.15, and 26-1152.16.
3 We note that FCUs are not subject to the filing requirements in §26.1152.21 because that requirement is limited to lenders subject to the jurisdiction of the Mayor. D.C. CODE ANN. §26- 1152.21. They are also not subject to §26-1152.07 that requires reporting certain information to credit bureaus. This provision is preempted by the Fair Credit Reporting Act, which expressly preempts state laws relating to the responsibilities of persons who furnish information to consumer reporting agencies. 15 U.S.C. §1681t(b)(1)(F).
There are several provisions that place conditions on a loan that are not required by NCUA’s lending regulation and are, therefore, preempted. 12 C.F.R. §701.21(b)(1). Some of these requirements, such as the prohibitions on unfair steering, bad faith charges, oppressive arbitration clauses, advance waivers, and the duty to ascertain that the broker is licensed are all sound business practices. D.C. CODE ANN. §§26-1152.06, 1152.10, 1152.17, 1152.18 and 1152.20. NCUA would take the appropriate administrative action if an FCU were engaging in these practices. Like the above requirements, the requirement to provide home ownership counseling places additional conditions on an FCU that is not required by NCUA’s regulations and is, therefore, preempted. D.C. CODE ANN. §26-1152.19.