Opinion ID: 666003
Heading Depth: 3
Heading Rank: 2

Heading: Law Governing Federal Savings Associations

Text: 33
34 The banks first direct our attention to the Home Owners' Loan Act (HOLA), 12 U.S.C. Secs. 1461-1468c. HOLA, which was originally passed during the Great Depression as an emergency relief measure, provided for the creation of a system of federal savings and loan associations regulated by a single federal agency, the Federal Home Loan Bank Board (FHLBB). de la Cuesta, 458 U.S. at 159-60, 102 S.Ct. at 3025-26. In 1989, Congress passed the Financial Institutions Reform, Recovery, and Enforcement Act, which amended the HOLA by dissolving the FHLBB and creating the OTS in its place. 12 U.S.C. Secs. 1462a-1464; First Gibraltar Bank, 815 F.Supp. at 1013. The HOLA authorizes federal savings associations to make loans on the security of liens upon residential real property to the extent specified in regulations of the Director of the OTS. 12 U.S.C. Sec. 1464(c)(1)(B). The statute also authorizes federal savings associations to make loans on the security of liens upon nonresidential real property, with certain limitations based upon the capital of the particular savings association. 12 U.S.C. Sec. 1464(c)(2)(B). 35 In 1978, the FHLBB first authorized federal savings associations to use three new types of mortgage instruments: the variable rate mortgage, the graduated payment mortgage, and the reverse annuity mortgage. 43 Fed.Reg. 59,336, 59,336 (1978) (The variable rate mortgage will ... be authorized on a state-by-state basis; the graduated payment mortgage and reverse-annuity mortgage are hereby authorized nationwide. (emphasis added)). The purpose of the new regulations was to meet the needs of homeowners during different phases of their financial life cycles. Id. 36 In 1981, the FHLBB promulgated a number of amendments regarding the lending authority of federal savings associations. One primary purpose of the amendments was to authorize those associations to make, purchase, participate or otherwise deal in adjustable mortgage loan instruments, which permit adjustment of the interest rate. 46 Fed.Reg. 24,148, 24,148 (1981). The adjustable mortgage loan regulation, 12 C.F.R. Sec. 545.6-4a, included an express preemption provision, which stated: 37 This exercise of the Board's authority is preemptive of any state law purporting to address the subject of a Federal association's ability or right to make, purchase, participate, or otherwise deal in adjustable mortgage loans, or to directly or indirectly restrict such ability or right. 38 12 C.F.R. Sec. 545.6-4a(a)(2) (1982). The commentary accompanying the new regulations noted, This preemption has the effect of precluding the application of the laws of approximately 30 states prohibiting the charging of interest on interest. 46 Fed.Reg. 24,148, 24,151 (1981). We take note of these changes in the regulation of adjustable rate mortgages because, at the same time, the FHLBB took the opportunity to amend 12 CFR 545.6-4, [authorizing] other alternative mortgage instruments, by inserting a similar preemption of inconsistent state law, id., which provision read as follows: 39 This regulation is promulgated pursuant to the plenary and exclusive authority of the Board to regulate all aspects of the operations of Federal associations.... This exercise of the Board's authority is preemptive of any state law purporting to address the subject of a Federal association's ability or right to make, purchase, or participate in the alternative mortgage instruments set forth in this section [namely graduated payment mortgages and reverse annuity mortgages], or to directly or indirectly restrict such ability. 40 12 C.F.R. Sec. 545.6-4(a)(2) (1982). 41 Another significant development in this area of the law prior to 1983 occurred when the Supreme Court decided the de la Cuesta case on June 28, 1982. At issue was a FHLBB regulation providing that due-on-sale clauses in mortgage instruments entered into by federal savings associations shall be exclusively governed by the terms of the loan contract, and all rights and remedies of the association and borrower shall be fixed and governed by that contract. de la Cuesta, 458 U.S. at 147, 102 S.Ct. at 3019 (quoting 12 C.F.R. Sec. 545.8-3(f) (1982)). The FHLBB stated in the preamble accompanying the final publication of the regulation that it intended to preempt any state laws imposing additional limitations on the enforceability of due-on-sale clauses. Id. (citing 41 Fed.Reg. 18,286, 18,287 (1976)). 42 The Court recognized that Congress may delegate its power to preempt state laws to federal agencies such as the FHLBB. Id. at 153, 154, 102 S.Ct. at 3022, 3022. The Court further stated that a pre-emptive regulation's force does not depend on express congressional authorization to displace state law; moreover, whether the administrator failed to exercise an option to promulgate regulations which did not disturb state law is not dispositive. Id. at 154, 102 S.Ct. at 3023. After stating these general principles, the Court turned aside all of the appellees' arguments against preemption, concluding that any ambiguity in the regulation regarding the FHLBB's preemptive intent was dispelled by the accompanying preamble. Id. at 158 & n. 13, 102 S.Ct. at 3025 & n. 13. Having decided that the FHLBB's regulation did indeed conflict with state law, the Court next considered whether the agency had acted within its statutory authority in issuing the preemptive regulation. Id. at 159, 102 S.Ct. at 3025. The Court had little difficulty concluding that Congress had given the FHLBB this power in the ample authority conferred on the agency in the HOLA to regulate the lending practices of federal savings and loans so as to further the Act's purposes. Id. 43
44 In 1983, the FHLBB opted to discontinue its practice of promulgating regulations specifically empowering federal savings associations to act and to permit such associations to exercise all powers granted them by the HOLA, subject only to limitations contained in the regulations. 48 Fed.Reg. 23,032, 23,032 (1983). This revision of the prior regulatory scheme resulted in the deletion of sections providing specific lending authority (such as Sec. 545.6-4), but the FHLBB emphasized that the deletion d[id] not mean that any authority c[ould] no longer be exercised. Id.; see 12 C.F.R. Sec. 545.1 (1984) (A Federal association may exercise all authority granted it by the [HOLA] and its charter and bylaws, whether or not implemented specifically by Bank Board regulation, subject to the limitations and interpretations contained in this Part.). The provision concerning preemption was relocated to 12 C.F.R. Sec. 545.2 (1984), and it provided that the regulations contained in Sec. 545 are preemptive of state law purporting to address the subject of the operations of a Federal association. We note that this approach has been continued by the OTS; the current versions of 12 C.F.R. Secs. 545.1 and 545.2 are essentially identical to their 1984 counterparts. 45 Regulatory limitations on the power of savings associations to make loans on the security of real estate are found in 12 C.F.R. Sec. 545.32 (1993). That section authorizes federal savings associations to originate, invest in, sell, purchase, service, participate, or otherwise deal in ... loans made on the security of residential or nonresidential real estate ... subject to the limitations of this part. 12 C.F.R. Sec. 545.32(a) (1993). Section 545.32 further provides that, 46 [s]ubject to the limitations in Secs. 545.33 and 545.35 of this part, a real estate loan may be fully amortized, partially amortized, non-amortized, or a line-of-credit loan, and the loan contract may provide for the deferral and capitalization of a portion of the interest. 47 12 C.F.R. Sec. 545.32(b)(4) (1993). In determining that federal preemption of Texas homestead law had not occurred, the district court relied largely on Sec. 545.32(c)(2), which provides: 48 (c) Security property. A loan is made on the security of real estate if: 49 (2) The security interest of the Federal savings association may be enforced as a real estate mortgage or its equivalent pursuant to the law of the state in which the property is located[.] 50 12 C.F.R. Sec. 545.32(c)(2) (1993) (emphasis added). 51 The banks also bring to our attention some correspondence between the Department of Housing and Urban Development (HUD) and the FHLBB. In 1988, HUD planned to implement a demonstration program in which it would insure some home equity conversion mortgages, and it sought an advisory opinion from the FHLBB as to whether its regulations had preempted Texas homestead law so as to make such mortgages enforceable in Texas by federal savings associations and state chartered associations. Deputy general counsel for the FHLBB responded with an opinion letter dated August 4, 1989. We quote from that letter at length: 52 Congress by statute has explicitly permitted Federal associations to secure loans with real estate. 12 U.S.C. Sec. 1464(c)(1)(B). It is axiomatic that the authority to secure loans protects lenders in the event of default on such loans by foreclosing on the property constituting the security. State laws which prevent or otherwise restrict Federal associations from engaging in transactions involving such mortgages, are in conflict with Bank Board regulations. 53 The Texas laws in question [i.e., the homestead exemption] clearly prevent Federal associations from exercising the authority granted to them by the HOLA and the Board's regulations. Therefore, this Office concludes that the constitution and statutes of Texas under review are an obstacle to the accomplishment and execution of the purposes and objectives of 12 C.F.R. pt. 545 to the extent that they prevent Federal associations from securing line of credit conversion mortgages with real estate consisting of homesteads, and foreclosing on such mortgages in the event of default. According to de la Cuesta, the HOLA authorizes the Board to enact regulations that preempt substantive state real property laws purporting to govern the mortgage lending operations of Federal associations. The regulatory history of 12 C.F.R. Sec. 545 reveals that the Board exercised this authority to preempt state real property laws, insofar as reverse mortgages are concerned.... 54 .... 55 ... [W]e opine that Federal associations are authorized to offer, and if the need arises, to foreclose upon line of credit conversion mortgages which are secured by Texas homesteads, despite contrary state law. 56 FHLBB General Counsel Opinion Letter, Fed.Banking L.Rep. (CCH) p 82,502, at 61,707-08 (August 4, 1989) (footnotes omitted) (emphases added) [hereinafter FHLBB Letter]. 57 The banks contend, with the full support of the OTS as amicus curiae, that these materials, taken together, demonstrate the intention of the FHLBB/OTS to preempt Texas homestead law insofar as it would prohibit federal savings associations from entering into and enforcing RAMs and line of credit conversion mortgages. 58