So You've Been Preempted-What Are You Going to Do Now?: Solutions for States Following Federal Preemption of State Predatory Lending Statutes

I. INTRODUCTION Home ownership is the foundation upon which the "American dream" is built; the goal of owning a home remains high on the list of priorities for Americans young and old.1 In April 2000, 70.7 million American families (67.1%) owned their homes, more than ever before in our nation's history.2 Although many factors likely contributed to those record levels, the increased availability of subprime credit was one important cause;3 the ability of individuals with blemished credit histories to obtain credit was never greater. The total dollar amount of subprime loans increased fourfold from $40 billion in 1994 to $160 billion in 1999,4 with the subprime market comprising "a little more than ten percent of the [overall] mortgage market."5 Although increased subprime lending contributed to that encouraging increase in home ownership, not all the consequences have been positive. As subprime loan originations have increased, so too have "predatory" loan practices.6 While individuals, consumer groups, state and federal government agencies, and state and federal politicians have become increasingly concerned about such practices and have called for changes in the way mortgage lending is regulated, they do not agree on the shape such changes should take.7 In particular, state and federal government approaches to the problem are not in accord. State and local governments have enacted laws that combat predatory loan practices by regulating banks and banking subsidiaries operating within their borders,8 only to have their efforts preempted by the Office of Thrift Supervision ("OTS") and the Office of the Comptroller of the Currency ("OCC").9 For instance, the OCC recently issued a preemption order and determination that the substantive provisions of the Georgia Fair Lending Act ("GFLA"), which prohibits various loan terms and features that the Georgia legislature deemed undesirable,10 does not apply to nationally chartered banks and their subsidiaries.11 The OCC determination, combined with the GFLA's parity provision (which makes the GFLA inapplicable to state banks if a federal regulatory agency determines that the GFLA does not apply to nationally chartered banks),12 makes the GFLA ineffective against all bank lenders in Georgia.13 These federal regulatory agencies have expressed concern that state predatory lending regulations, such as the GFLA, interfere with the ability of national financial institutions to regulate real estate finance.14 State and local policymakers, however, insist that federal laws and regulations are not strict enough.15 As the problem of predatory lending continues and federal agencies show a willingness to preempt state regulations that affect nationally chartered financial institutions, states are left with fewer options for protecting at-risk consumers in the subprime market. This Comment discusses this problem and suggests that states may reduce abusive subprime lending, in spite of federal orders preempting their legislative and regulatory efforts, by improving regulation of nonbank loan sellers and increasing enforcement of state deceptive and unfair trade practices acts. Part II defines predatory lending, discusses why it is a problem, and briefly recounts current federal and state remedies. Part III outlines the reasoning behind the OCC's recent order and determination, which preempts the GFLA and sets the stage for future orders preempting state predatory lending laws. It also briefly outlines OTC preemption orders that have determined that the GFLA and a similar New Jersey predatory lending law are not applicable to federally chartered savings and thrift associations or their subsidiaries.16 Part IV provides two suggested solutions for states seeking to develop effective tactics for fighting predatory lending practices without running afoul of preemption concerns: the increased regulation of nonbank sellers of loans (primarily mortgage brokers who often operate outside federal and state regulatory structures), and increased enforcement of state deceptive and unfair trade practices acts (such as mini-FTC acts). …