December 21, 2007

Bruce Pearson, Esq.

Styskal, Weise & Melchione, LLP

550 North Brand Boulevard, Suite 550

Glendale, CA 91203

Re: Preemption of Notice Provisions in California Rees-Levering
Automobile Sales Finance Act.

Dear Mr. Pearson:

You have requested that we consider whether the Federal Credit Union Act
(Act) and the lending regulation issued by the National Credit Union
Administration (NCUA) preempt the notice provision in a California law
directed at automobile sales finance lenders. CAL. CIV. Code §2983.2(a)
(West 1993). Yes, we conclude the notice provision's penalty, which is
the loss of the right to collect a deficiency judgment, directly affects
the terms and conditions of lending and is preempted. We do not preempt
the substantive rights under state law regarding default or the
circumstances for curing default.

This California statute requires a creditor to provide a detailed,
comprehensive notice to the borrower of intent to dispose of a
repossessed motor vehicle. The notice must:

-   advise the borrowers of their right to redeem the motor vehicle by
    paying the full amount of the indebtedness within fifteen days of
    the giving of the notice and provide an itemization of the contract
    balance and any costs of collection and an itemization of the amount
    of any credit for unearned finance charges or cancelled insurance;

-   specifically state either that there is a conditional right to
    reinstate the contract until the expiration of fifteen days from the
    date of giving notice or that there is no right of reinstatement and
    provide a statement of reasons therefor;

-   allow a ten-day extension of the redemption and any reinstatement
    periods upon written request;

-   disclose where the vehicle will be returned upon redemption or
    reinstatement, designate the name  and address of the person or
    office to whom payment is to be made;

-   state the seller's or holder's intent to dispose of the vehicle
    after the expiration of the applicable periods of time;

Bruce Pearson

Page Two

-   inform the persons being given notice of their right to an
    accounting regarding the disposition of the vehicle upon written
    request; and

-   include a notice in specific statutory language in at least
    ten-point bold type regarding their potential liability for a
    deficiency, and inform the persons being given notice of their
    liability for the deficiency balance plus interest.

Cal. [Civ. Code §2983.2(a) (West 1993). Failure on the part of the
creditor to comply with these requirements destroys the creditor's
ability to hold the borrower liable for any deficiency.
*Id.*](http://www.lexis.com/research/buttonTFLink?_m=997d27420db8ca7bd5b2da6dcab439bd&_xfercite=<cite cc%3D"USA"><!%5BCDATA%5B140 Cal. App. 4th 637%5D%5D><%2Fcite>&_butType=4&_butStat=0&_butNum=50&_butInline=1&_butinfo=CAL. CIV. CODE 2983.2&_fmtstr=FULL&docnum=1&_startdoc=1&wchp=dGLbVtb-zSkAW&_md5=afd37e13f1c6aaccd65dc97a530d6824)

NCUA's position regarding preemption of state law in certain areas of
lending, as stated in its lending regulation, derives from the authority
granted to the NCUA Board by the Federal Credit Union Act. 12 U.S.C.
§§1751 *et seq*. Federal credit unions are federal instrumentalities,
chartered and regulated under federal law. The NCUA, headed by a
three-member Board appointed by the president, is an independent federal
agency within the executive branch and is the cradle-to-grave regulator
of federal credit unions. In addition to its role as the chartering
authority and supervisor of federal credit unions, the NCUA, through the
National Credit Union Share Insurance Fund, provides federal share
insurance for all accounts in federal credit unions and, upon
application, to state-chartered credit unions.

NCUA's lending regulation expressly preempts state laws affecting the
terms of repayment for all loans.[^1] The regulation states:

> 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

Bruce Pearson

Page Three

> and lines of credit (including credit cards) to members. This exercise
> of the Board's authority preempts any state law purporting to limit or
> affect:
>
> \* \* \*
>
> \(ii\) terms of repayment, including:
>
> \* \* \*
>
> \(B\) the amount, uniformity, and frequency of payments, including the
> accrual of interest if payments are insufficient to pay all interest
> due.

12 C.F.R. §701.21(b)(1). The California law at issue affects the terms
of repayment by placing additional burdens on lenders before they may
recover deficiency balances owed by borrowers. NCUA's long-standing
position is that state laws affecting terms of repayment are preempted.
49 Fed. Reg. 30683, 30684 (August 1, 1984).

Our lending rule contains an express disclaimer of any intent to preempt
state laws imposing conditions related to "the circumstances in which a
borrower may be declared in default and may cure default." 12 C.F.R.
701.21(b)(2)(iii)(C). Although default triggers the effect of a failure
to comply with the notice obligations in the California statute
--namely, eliminating the lender's right to a collect a deficiency
judgment---this state statute does not, in fact, address the
circumstances in which default may be declared. The requisite notice
addresses a right of reinstatement, but goes significantly further than
simply providing notice regarding the debtor's right to cure the
default. Failure of the creditor to adhere to the notice provisions
results in the creditor's inability to recover the full amount it lent
to the consumer. Thus, the law directly affects a fundamental repayment
term.[^2] NCUA's regulation specifies that state laws having that effect
are preempted. 12 C.F.R. §701.21(b)(1). We also note NCUA's regulation
specifies that, even where aspects of a state law have applicability to
federal credit unions, NCUA has exclusive authority to take enforcement
actions against the credit union. 12 C.F.R. §701.21(b)(4). We view the
California statute's effect of eliminating a right to collect
deficiencies for failure to comply with the notice

Bruce Pearson

Page Four

provisions as an enforcement tool and, for that further reason, conclude
its application to FCUs is inappropriate.

Sincerely,

/S/

Sheila A. Albin

Associate General Counsel

OGC/RPK:bhs

SSIC 3000/07-0562A

[^1]: A California appellate court recently reviewed the applicability
    of this provision of state law to federally chartered thrifts in
    California. Although the case was appealed to the state's supreme
    court and was settled before that court could rule on the issues, we
    find the appellate court's reasoning as to the impact of this law to
    be persuasive. The appellate court characterized the required
    statutory notice as a "credit related document" that added terms to
    the loan document for the event of default, limiting the creditor's
    right to enforce its security interest and obtain a deficiency
    judgment. *WFS Financial, Inc. v. Superior Court,* 140 Cal. App.
    4^th^ 637 (Cal. Ct. App., 2006), at 652. The court concluded the
    required notice provision imposed terms that affected the lender's
    ability to collect on delinquent loans and impermissibly regulated
    and affected the lending activities of federally chartered thrifts.
    *Id*. As such, the court found the California statute preempted by
    OTS rules, which expressly occupy the field of lending regulation
    for federally chartered thrifts. *Id.*

[^2]: Several years ago, we considered the applicability to federal
    credit unions of a California statute imposing certain additional
    disclosure obligations on credit card issuers. We concluded that the
    statute was preempted as to federal credit unions. OGC Op. No.
    02-0638 (June 26, 2002). In subsequent litigation involving the
    issue, a federal court ruled that that statute was preempted as to
    its application to federally chartered financial institutions.
    *American Bankers Association v. Lockyer*, 239 F. Supp. 2d
    1000 (E.D. Cal. 2002).