[Federal Register Volume 68, Number 38 (Wednesday, February 26, 2003)]
[Notices]
[Pages 8959-8964]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-4507]


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DEPARTMENT OF THE TREASURY

Office of the Comptroller of the Currency

[Docket No. 03-04]


Notice of Request for Preemption Determination or Order

AGENCY: Office of the Comptroller of the Currency, Treasury.

ACTION: Notice and request for comments.

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SUMMARY: The Office of the Comptroller of the Currency (OCC) is 
publishing for comment a request by National City Bank, N.A., National 
City Bank of Indiana, N.A., and their operating subsidiaries, National 
City Mortgage Company and First Franklin Financial Company (referred to 
collectively in this notice as National City) for a determination or 
order under 12 U.S.C. 24(Seventh), 12 U.S.C. 371 and the OCC's 
implementing regulations, that the Georgia Fair Lending Act does not 
apply to National City. The purpose of this notice is to afford 
interested persons and affected parties an opportunity to submit 
comments before the OCC issues any determination or order responding to 
this request.

DATES: Comments must be received on or before March 28, 2003.

ADDRESSES: Please direct your comments to: Office of the Comptroller of 
the Currency, 250 E Street, SW., Public Information Room, Mailstop 1-5, 
Attention: Docket No. 03-04, Washington, DC 20219, fax number (202) 
874-4448, or Internet address: [email protected]. Due to 
delays in paper mail delivery in the Washington area, commenters are 
encouraged to submit their comments by fax or e-mail. Comments may be 
inspected and photocopied at the OCC's Public Reference Room, 250 E 
Street, SW., Washington, DC 20219. You can make an appointment to 
inspect or photocopy the comments by calling (202) 874-5043.

FOR FURTHER INFORMATION CONTACT: Michele Meyer, Counsel, Legislative 
and Regulatory Activities Division, (202) 874-5090.

SUPPLEMENTARY INFORMATION: The Georgia Fair Lending Act (GFLA) \1\ 
became effective October 1, 2002. The GFLA restricts the ability of 
creditors or servicers to charge certain fees and engage in certain 
practices for three categories of loans defined by the GFLA: ``home 
loans,'' ``covered home loans,'' and ``high-cost home loans.'' The 
characterization of a loan within each of these categories depends on 
the annual percentage rate and the amount of points and fees 
charged.\2\ All ``home loans'' are subject to certain restrictions on 
the terms of credit and loan-related fees, including prohibitions on 
the financing of credit insurance, debt cancellation coverage or 
suspension coverage, and limitations on late fees and payoff statement 
fees.
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    \1\ The GFLA is to be codified as GA Code. Ann. Sec. Sec.  7-6A-
1 et seq.
    \2\ See GFLA Sec.  7-6A-2.
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    In addition to the restrictions on ``home loans,'' ``covered home 
loans'' are subject to restrictions on the number of times a loan may 
be refinanced and the circumstances in which a refinancing may occur. 
For example, the GFLA prohibits a creditor from refinancing an existing 
home loan that is less than five years old with a ``covered home loan'' 
that does not provide a reasonable ``tangible net benefit'' to the 
borrower considering all the circumstances.
    ``High-cost home loans'' are subject to the restrictions on ``home 
loans'' and ``covered home loans,'' as well as numerous disclosure 
requirements and restrictions on the terms of credit and

[[Page 8960]]

loan-related fees. Creditors must disclose to borrowers that the loan 
is high-cost, and borrowers must attend loan counseling before the 
creditor may make the loan. In addition, the GFLA prohibits pre-payment 
penalties, balloon payments, negative amortization, increases in the 
interest rates after default, advance payments from loan proceeds, fees 
to modify, renew, extend, amend or defer a payment, and accelerating 
payments at the creditor's or servicer's sole discretion.
    National City requests the OCC to issue a determination or order 
that 12 U.S.C. 24(Seventh), 12 U.S.C. 371 and their implementing 
regulations preempt the GFLA. A copy of the request appears as an 
Appendix to this notice. We will publish any final determination or 
order responding to National City's request in the Federal Register.
    Regardless of the ultimate conclusion reached regarding preemption 
of the GFLA or any other similar state or local law, abusive and 
predatory lending practices that take unfair advantage of borrowers, or 
have a detrimental effect on communities, may violate a number of 
federal laws, and do conflict with the high standards by which the OCC 
expects national banks to conduct their operations. Accordingly, 
concurrent with issuance of this Notice of Request for Preemption 
Determination or Order, the OCC is issuing two Advisory Letters. 
Advisory Letter 2003-2, ``Guidelines for National Banks to Guard 
Against Predatory and Abusive Lending Practices,'' February 21, 2003, 
and Advisory Letter 2003-3, ``Avoiding Predatory and Abusive Lending 
Practices in Brokered and Purchased Loans,'' February 21, 2003. 
Together these two Advisory Letters set forth standards that should 
assure that national banks are not directly involved, or indirectly 
associated with, predatory or abusive lending practices.

Issues Presented by National City's Request

    National City has the asked the OCC to determine that 12 U.S.C. 
24(Seventh) and 371 preempt the GFLA. This request requires determining 
whether ``Congress, in enacting the Federal Statute, intend[ed] to 
exercise its constitutionally delegated authority to set aside the laws 
of a State.'' Barnett Bank of Marion County, N.A. v. Nelson, et al.\3\
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    \3\ 517 U.S. 25, 30 (1996).
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    Central to the issues raised by National City is 12 U.S.C. 371, 
which vests in the OCC comprehensive authority to regulate and restrict 
the real estate lending activities of national banks. Section 371 
provides:

    [a]ny national banking association may make, arrange, purchase 
or sell loans or extensions of credit secured by liens on interests 
in real estate, subject to section 1828(o) of this title and such 
restrictions and requirements as the Comptroller of the Currency may 
prescribe by regulation or order.

    The exercise of the powers granted by section 371 is not 
conditioned on compliance with any state requirement.\4\ Notably, the 
exercise of powers under that section is subject only to such rules and 
regulations as the Comptroller may prescribe.
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    \4\ Subsequent Federal legislation may provide, however, that 
national banks shall conduct certain activities subject to state law 
standards. For example, national banks conduct insurance sales, 
solicitation, and cross-marketing activities subject to certain 
types of state restrictions expressly set out in the Gramm-Leach-
Bliley Act. See 15 U.S.C. 6701(d)(2)(B). There is no similar Federal 
legislation subjecting national banks' real estate lending 
activities to state law standards.
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    In Barnett, the Supreme Court analyzed a similarly structured 
statute, 12 U.S.C. 92 and the extent to which section 92 leaves room 
for state regulation of the activities the statute authorizes. There, 
the Supreme Court stated that:

    [section 92's] language suggests a broad, not a limited, 
permission. That language says, without relevant qualification, that 
national banks ``may * * * act as the agent'' for insurance sales. 
12 U.S.C. 92. It specifically refers to ``rules and regulations'' 
that will govern such sales, while citing as their source not state 
law, but the federal Comptroller of the Currency.\5\
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    \5\ Barnett, 517 U.S. at 32.

The Court concluded that ``where Congress has not expressly conditioned 
the grant of ``power'' upon a grant of state permission, the Court has 
ordinarily found that no such condition applies.'' \6\
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    \6\ Id. at 34.
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    The Congressional delegation to the Comptroller of authority under 
section 371 mentions only conditions imposed by the OCC for national 
banks pursuant to section 1828(o) and ``such restrictions and 
requirements as the Comptroller of the Currency may prescribe by 
regulation or order.'' It makes no mention of conditions imposed by 
state law. Citing the judicial maxim of statutory interpretation 
expressio unius est exclusio alterius (``mention of one thing implies 
exclusion of another''), National City contends that this plain 
language evidences a Congressional intent to permit only the OCC to 
impose conditions on national bank real estate lending regulation, 
leaving no room for state involvement.
    The legislative history of section 371 lends support to this 
construction. National banks' real estate lending activities have 
consistently been subject to comprehensive Federal regulation ever 
since the authority to lend on the security of real estate was first 
granted to them in the Federal Reserve Act of 1913. For many years, 
national banks' real estate lending authority was governed by the 
express terms of section 371. As originally enacted in 1913, section 
371 contained a limited grant of authority to national banks to lend on 
the security of ``improved and unencumbered farm land, situated within 
its Federal reserve district.'' \7\ In addition to the geographic 
limits inherent in this authorization, the Federal Reserve Act also 
imposed limits on the term and amount of each loan as well as an 
aggregate lending limit. Over the years, section 371 was repeatedly 
amended to broaden the types of real estate loans national banks were 
permitted to make, to expand geographic limits, and to modify loan term 
limits and per-loan and aggregate lending limits. In 1982, Congress 
removed these ``rigid statutory limitations'' \8\ in favor of a broad 
provision authorizing national banks to ``make, arrange, purchase, or 
sell loans or extensions of credit secured by liens on interest in real 
estate, subject to such terms, conditions, and limitations as may be 
prescribed by the Comptroller of the Currency by order, rule, or 
regulation.'' \9\ The purpose of the 1982 amendment was ``to provide 
national banks with the ability to engage in more creative and flexible 
financing, and to become stronger participants in the home financing 
market.'' \10\ In 1991, Congress removed the term ``rule'' from this 
phrase \11\ and enacted an additional requirement, codified at 12 
U.S.C. 1828(o), that national banks (and other insured depository 
institutions) conduct real estate lending pursuant to ``uniform 
standards'' adopted at the Federal level by regulation of the OCC and 
the other Federal banking agencies.\12\ Thus, the history of national 
banks' real estate lending activities under section 371 is one of 
extensive Congressional involvement gradually giving way to a

[[Page 8961]]

streamlined approach in which Congress has delegated broad authority to 
the Comptroller.\13\ It may therefore be argued that section 371 
evidences an intent for the OCC to occupy the field of regulation of 
national banks' real estate lending except, of course, where Congress 
in other legislation has made them subject to additional requirements, 
e.g. the Truth in Lending Act.\14\
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    \7\ Federal Reserve Act, ch. 6, Sec.  24, 38 Stat. 251, 273 
(1913).
    \8\ S. Rep. No. 97-536, at 27 (1982).
    \9\ Garn-St Germain Depository Institutions Act of 1982, Pub. L. 
97-320, Sec.  403, 96 Stat. 1469, 1510-11 (1982).
    \10\ S. Rep. No. 97-536, at 27 (1982).
    \11\ This language was changed without explanation.
    \12\ Section 304 of the Federal Deposit Insurance Corporation 
Improvement Act, 12 U.S.C. 1828(o). These standards governing 
national banks' real estate lending are set forth in subpart D of 
part 34.
    \13\ We note that in Rice v. Santa Fe Elevator Corp., 331 U.S. 
218 (1946), the Supreme Court considered a statute that had been 
similarly revised to delegate exclusive authority under it to the 
Secretary of Agriculture. Even though the statutory revision in 
question in Rice authorized the Secretary ``to cooperate with State 
officials,'' the Supreme Court found the revision evidence that 
Congress acted ``so unequivocally as to make clear that it intends 
no regulation except its own.'' Id. at 236.
    \14\ 15 U.S.C. 1601 et seq.
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    The OCC has implemented section 371 in regulations set forth at 12 
CFR part 34. Subpart A of part 34, by its terms, applies to both 
national banks and their operating subsidiaries.\15\ Twelve CFR 34.3 
establishes the general rule that a national bank and its operating 
subsidiaries may engage in real estate lending subject only to the 
``terms, conditions, and limitations prescribed by the Comptroller of 
the Currency by regulation or order.'' Twelve CFR 34.4(a) expressly 
provides that five types of state law limitations are not applicable to 
real estate loans made by national banks and their operating 
subsidiaries:
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    \15\ See 12 CFR 34.1(b).
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    (a) Specific preemption. A national bank may make real estate loans 
under 12 U.S.C. 371 and Sec.  34.3 without regard to State law 
limitations concerning:
    (1) The amount of a loan in relation to the appraised value of the 
real estate;
    (2) The schedule for the repayment of principal and interest;
    (3) The term to maturity of the loan;
    (4) The aggregate amount of funds that may be loaned upon the 
security of real estate; and
    (5) The covenants and restrictions that must be contained in a 
lease to qualify the leasehold as acceptable security for a real estate 
loan.
    It would appear that a number of GFLA provisions fall within the 
scope of Sec.  34.4(a). For example, National City argues that a number 
of GFLA prohibitions, including those on balloon payments, negative 
amortization, advance payments from the loan proceeds and acceleration 
at the creditor's or servicer's discretion, are state law limitations 
concerning the ``schedule for the repayment of principal and interest'' 
and are therefore preempted by Sec.  34.4(a)(2).
    Twelve CFR 34.4(b) states:
    The OCC will apply recognized principles of Federal preemption in 
considering whether State laws apply to other aspects of real estate 
lending by national banks.\16\
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    \16\ See 12 CFR 24.4(b).
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    It may be argued that the structure of Sec.  371 and Sec.  34.3, 
together with the express preemption delineated in Sec.  34.4(a), 
evidence a presumption that state law does not apply to the real estate 
lending activities of national banks and their operating subsidiaries 
unless the OCC determines under Sec.  34.4(b) that a particular state 
law is not preempted. In other words, in ``considering whether state 
laws apply'' for purposes of issuing an order under section 371, the 
OCC could either issue an order confirming that the law is not 
applicable or providing that it will be applicable after applying the 
``recognized principles of preemption'' referred to in Sec.  34.4(b). 
Thus, in effect, National City argues that section 371 authorizes the 
OCC to ``occupy the field'' of real estate lending regulation for 
national banks, and that, through its regulations, including Sec.  
34.4(a) and (b), the OCC has done so.
    Thus, in order to implement Sec.  34.4(b) to determine whether any 
of the GFLA provisions not otherwise preempted under Sec.  34.4(a) 
apply to National City, the OCC examines whether the state law ``stands 
as an obstacle to the accomplishment and execution of the full purposes 
and objectives of Congress.'' \17\ In the present context, the OCC must 
examine the effect that the state law provisions have on a national 
bank's exercise of the federally authorized power to engage in real 
estate lending granted by Federal statutes, including 12 U.S.C. 
371.\18\ As set out in detail in its request, National City asserts 
that various GFLA provisions place impermissible limits on the exercise 
of national banks' real estate lending powers under 12 U.S.C. 371 and 
place impermissible limits on the exercise of national banks' authority 
to lend money generally under 12 U.S.C. 24(Seventh) and to charge fees 
for lending products or services.\19\
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    \17\ Barnett, 517 U.S. at 31, quoting Hines v. Davidowitz, 312 
U.S. 52, 67 (1941).
    \18\ As explained below, National City also argues that a number 
of GFLA provisions impair the bank's ability to exercise its general 
lending authority under 12 U.S.C. 24 (Seventh).
    \19\ The OCC's regulation at 12 CFR 7.4002 reaffirms that 
ability to charge a fee for a bank's services.
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    National City accordingly requests the OCC to issue a determination 
or an order under 12 U.S.C. 24(Seventh) and 12 U.S.C. 371 that the 
identified provisions of the GFLA do not apply to National City.

Request for Comments

    The OCC solicits comment on the issues raised by the National City 
request.

    Dated: February 13, 2003.
John D. Hawke, Jr.,
Comptroller of the Currency.

Appendix--National City's Request

February 11, 2003.

Julie L. Williams, First Senior Deputy Comptroller of the Currency 
and Chief Counsel, Office of the Comptroller of the Currency, 250 E. 
Street, SW., Washington, DC 20219.
Re: Request for Preemption Determination or Order.

    Dear Ms. Williams: On behalf of National City Bank, National 
City Bank of Indiana and its operating subsidiaries First Franklin 
Financial Corporation and National City Mortgage Co. we hereby 
request the Office of the Comptroller of the Currency (``OCC'') to 
issue a preemption determination or Order under 12 U.S.C. 371 that 
the Georgia Fair Lending Act (``GFLA'') is preempted by federal law 
and regulations, specifically 12 U.S.C. 24 (Seventh), 371 and 484 
and 12 CFR 34.1(b), 34.3, 34.4, 7.4002 and 7.4006 as it relates to a 
national bank and its operating subsidiaries in the exercise of 
their federally granted real estate lending powers.

I. Background

A. The Requesting Parties

    National City Bank and National City Bank of Indiana both are 
national banks, chartered, regulated, and supervised by the OCC. 
National City Mortgage Co. and First Franklin Financial Corporation 
are wholly owned operating subsidiaries of National City Bank of 
Indiana and are similarly regulated and supervised by the OCC.
    National City Bank originates in its own name and funds home 
equity loans and lines of credit on a nationwide basis. National 
City Mortgage Co. originates in its own name and funds first and 
second mortgage loans throughout the United States for the purpose 
of financing and refinancing the acquisition and construction of 
real property consisting of one to four family residential 
dwellings. First Franklin Financial Corporation originates in its 
own name and funds first and second mortgage loans that enable 
borrowers to acquire and refinance one to four family residential 
real property. In this request, National City Bank, National City 
Mortgage Co. and First Franklin Financial Corporation are 
collectively referred to as ``National City.'' National City 
receives loan applications from third party mortgage brokers, and 
those mortgage brokers perform many services resulting in the 
origination of the loans and lines of credit by National City in its 
own name.

B. The Georgia Fair Lending Act

    The GFLA became effective on October 1, 2002. In the enactment 
of GFLA the Georgia Legislature was attempting to address abuses

[[Page 8962]]

it perceived in the marketplace that disadvantaged persons who may 
have impaired credit or were unfamiliar with real estate lending 
procedures and terms. There may be a legitimate state purpose for 
regulation of lending practices which are otherwise unsupervised. 
However, that purpose has no applicability to national banks and 
their operating subsidiaries, which are subject to comprehensive 
regulation and supervision by the OCC as required by federal law.
    GFLA restricts national banks and their operating subsidiaries' 
ability to originate mortgage loans in the state of Georgia, set 
interest rates, fees and credit terms, establish disclosures and 
utilize the services of third party mortgage brokers in the 
origination process. GFLA applies to all consumer-purpose loans and 
lines of credit secured by borrower-occupied one to four family 
residential property within the conforming loan limit set by FNMA 
for a single-family dwelling except reverse mortgages, bridge loans 
and loans which are also secured by personal property (``Home 
Loan''). Certain of GFLA's restrictions apply to all Home Loans. 
Other limitations apply to one or both of the two sub-categories of 
Home Loans created by GFLA as it was originally enacted: Covered 
Home Loans and High Cost Home Loans. Whether a Home Loan fits into 
these categories depends on the loan's interest rate and fees and 
charges. The fees and charges which cause a Home Loan to be 
categorized as a Covered Home Loan or High Cost Home Loan include 
the fees paid to a third party mortgage broker.
    GFLA establishes specific and burdensome limitations on 
mortgage-secured loans and lines of credit that significantly 
interfere with National City's ability to make these loans. All Home 
Loans are subject to restrictions on the terms of credit and certain 
loan related fees, including the prohibition of financing of credit 
insurance, debt cancellation and suspension coverage, and limiting 
late charges and prohibiting payoff and release fees. If the loan or 
line of credit is a Covered Home Loan which refinances a Home Loan 
which was closed within the previous five years, National City is 
restricted from originating it unless the refinanced transaction 
meets standards established by GFLA. If the loan or line of credit 
is a High Cost Home Loan, GFLA does not permit National City to 
originate it unless the borrower has received advance counseling 
with respect to the advisability of the transaction from a third 
party nonprofit organization. GFLA regulates National City's ability 
to determine the borrower's ability to repay the High Cost Home 
Loan. GFLA restricts, and in some cases prohibits, the imposition by 
National City of certain credit terms or servicing fees on High Cost 
Home Loans, including: prepayment penalties, balloon payments, 
advance loan payments, acceleration in the lender's discretion, 
negative amortization, post-default interest and fees to modify, 
renew, amend or extend the loan or defer a payment. Any High Cost 
Home Loan must contain a specific disclosure that it is subject to 
special rules, including purchaser and assignee liability, under 
GFLA. Finally, GFLA imposes pre-foreclosure requirements.
    GFLA currently creates strict assignee liability for all 
subsequent holders of a home loan. GFLA provides a private right of 
action for borrowers against lenders, mortgage brokers, assignees 
and servicers for injunctive and declaratory relief as well as 
actual damages, including incidental and consequential damages, 
statutory damages equal to forfeiture of all interest or twice the 
interest paid, punitive damages, attorneys' fees and costs. In 
addition, the Georgia Attorney General, district attorneys, the 
Commissioner of Banking and Finance and, with respect to the 
insurance provisions, the Commissioner of Insurance has the 
jurisdiction to enforce GFLA through their general state regulatory 
powers and civil process. Criminal penalties are also available.
    The uncapped investor liability caused Standard & Poors, Moody's 
Investor Services and Fitch Ratings to cease rating any security 
that includes GFLA-governed loans. As of February 4, 2003 Fitch 
Ratings declined to rate Georgia Home Loans in RMBS pools. Fitch 
ratings also announced that it was considering the impact of further 
state and local predatory lending legislation on its ability to rate 
transactions. As a result, the GFLA impairs National City's ability 
to securitize or sell their loans on the secondary market.
    In light of the recent pronouncements by the securities rating 
agencies, the Georgia Legislature is considering amendments to GFLA 
which could limit or eliminate liability for assignees and 
purchasers, remove the category of Covered Loans and make other 
substantive changes to the law. These proposed changes, if enacted, 
will reduce the number of loans categorized as High Cost Home Loans 
and might provide limited safe harbors for refinancings. However, 
the proposed amendments would not affect the restrictions on loan 
fees and terms for Home Loans and High Cost Home Loans and the 
preconditions for originating a High Cost Home Loan. One proposal 
would also restrict the refinancing of any Home Loan originated in 
the previous five years unless the refinancing meets GFLA's 
standards. Therefore, the proposed amendments do not obviate 
National City or any other national banking organization's need for 
a preemption determination.

C. Impact of GFLA on National City's Real Estate Lending in Georgia

    The effect of GFLA is to limit National City's ability to 
originate and to establish the terms of credit on residential real 
estate loans and lines of credit, including loans or lines of credit 
submitted by a third party mortgage broker. GFLA has significantly 
impaired National City's ability to originate residential real 
estate loans in Georgia.
    In addition to preventing National City from exercising its 
fundamental powers to engage in residential real estate transactions 
and to incorporate credit terms that National City feels may be 
necessary to lend in a safe and sound manner, GFLA has also 
adversely affected the investor market for Georgia loans. The 
restrictions imposed by GFLA have lead the Government Sponsored 
Enterprises (``GSE's'') to limit the loans they will purchase from 
National City and other originators, and Standard and Poors, Fitch 
Ratings and Moody's Investor Service have publicly stated they will 
not allow a GFLA governed loan in a rated structured financial 
transaction. This is another example of how the GFLA adversely 
affects National City's ability to sell or securitize loans.\20\
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    \20\ We note that other states and localities have passed 
similar restrictions that also adversely affect National City's real 
estate lending.
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II. Reasons Supporting the Requested Preemption of GFLA

A. GFLA Is Preempted by Paramount Federal Law

    National banks and their operating subsidiaries have broad 
authority to originate and establish the terms and conditions of 
mortgage loans, subject only to the paramount regulations and orders 
established by the Office of the Comptroller of the Currency 
(``OCC'').
    Federal law may preempt state law (1) where Congress has 
expressly preempted state law, (2) where Congress has occupied the 
field the state seeks to regulate, and (3) where state law actually 
conflicts with federal law. Schneidewind v. ANR Pipeline Co., 485 
U.S. 293, 299-300 (1988). In applying the test put forth by the 
United States Supreme Court in Barnett Bank, N.A. v. Nelson, 517 
U.S. 25 (1996), 134 L. Ed.2d 237 to the facts here it is clear that 
Congress provided national banks with a broad grant of powers under 
12 U.S.C. 24 (Seventh) and a specifically broad grant of powers for 
real estate lending pursuant to 12 U.S.C. 371. This grant of power 
to permit real estate lending is the exact activity which GFLA 
restricts. The State's prohibitions under GFLA ``stand as an 
obstacle to the accomplishment'' of one of the federal statute's 
purposes, Hines v. Davidowitz, 312 U.S. 52, 67, 85 L. Ed. 581, 61 S. 
Ct. 399 (1941).
    Twelve U.S.C. Sec.  371 occupies the field of mortgage lending 
subject only to such regulations and orders as are adopted by the 
OCC. The Supreme Court has recognized that state law generally 
should not limit powers granted by Congress--

    In using the word ``powers,'' the statute chooses a legal 
concept that, in the context of national bank legislation, has a 
history. That history is one of interpreting grants of both 
enumerated and incidental ``powers'' to national banks as grants of 
authority not normally limited by, but rather ordinarily preempting, 
contrary state law. Barnet Bank v. Nelson, 517 U.S. 25 at 32 (1996). 
See also Bank One v. Guttau, 190 F.3d 844, 847 (8th Cir. 1999).

    The Supreme Court has held that federal law preempts not only 
state laws that purport to prohibit a national bank from engaging in 
an activity permissible under federal law but also state laws that 
condition the exercise by a national bank of a federally authorized 
activity.

    [W]here Congress has not expressly conditioned the grant of 
``power'' upon a grant of state permission, the Court has ordinarily 
found that no such condition applies. In Franklin Nat. Bank, the 
Court

[[Page 8963]]

made this point explicit. It held that Congress did not intend to 
subject national banks' power to local restrictions because the 
federal power-granting statute there in question contained `no 
indication that Congress [so] intended* * * as it has done by 
express language in several other instances.' Barnett, 517 U.S. at 
34 (citations omitted; emphasis in original).
    As was the case in Barnett, Congress placed no restrictions in 
12 U.S.C. 371 on the ability to conduct real estate lending 
activities other than by rules and/or regulations as may be 
promulgated by the OCC. The OCC has done so by promulgating 12 CFR 
34, which by its terms reserves no right to the states to regulate 
in the area of real estate lending by a national bank or its 
operating subsidiary. National City is of the opinion as supported 
by the Supreme Court's decision in Barnett that the federal statute 
governing the power of a national bank to lend creates a scheme of 
federal law and regulation so pervasive as to make reasonable the 
inference that Congress left no room for the States to supplement 
it.
    Therefore, a conflict between GFLA and federal law need not be 
complete in order for federal law to have preemptive effect. If, as 
here, the state law (GFLA) places limits on an unrestricted grant of 
authority under federal law, the state law (GFLA) is preempted.

B. The Preemption Analysis Applicable to National Banks Applies 
With Equal Force to National Bank Operating Subsidiaries

    In section 121 of the Gramm Leach Bliley Act (``GLBA''), 
Congress expressly acknowledged that national banks may own 
subsidiaries that engage ``solely in activities that national banks 
are permitted to engage in directly and are conducted subject to the 
same terms and conditions that govern the conduct of such activities 
by national banks.'' 12 U.S.C. 24 a(g)(3).
    Consistent with section 121, the OCC regulations state that 
``[a]n operating subsidiary conducts activities authorized under [12 
CFR 5.34] pursuant to the same authorization, terms and conditions 
that apply to the conduct of such activities by its parent national 
bank. 12 CFR 5.34(e)(3); See also 12 CFR 7.4006.
    National City's operating subsidiaries are conducting mortgage 
lending and servicing activities as permitted for a national bank 
pursuant to 12 U.S.C. 24(Seventh), 12 U.S.C. 371, and 12 CFR 
5.34(e)(5)(v). As such, they are subject to federal law and States 
do not have the right to limit the powers over a national bank or 
its operating subsidiaries in the conduct of these real estate 
lending activities, except where such authority is specifically 
granted by federal law, which is not the case here. Like the Bank, 
the operating subsidiaries are examined on a continuous basis by OCC 
examiners specifically assigned to, and in most cases physically 
present at, the facilities of the Banks and their operating 
subsidiaries.

C. National Bank Real Estate Powers and Part 34 of the 
Comptroller's Regulations

    The National Bank Act's underlying objective is to create a 
uniformly regulated national banking system. The National Bank Act 
is a comprehensive statute which governs not only the internal 
workings of national banks, but also their powers, and virtually all 
aspects of their regulation is the exclusive responsibility of the 
OCC. See OCC Unpublished Interpretive Letter dated September 5, 1989 
(holding that a Wisconsin statute imposing notification filing and 
fee requirements on lenders making certain consumer loans was 
preempted for national banks); OCC Advisory Letter 2002-9. In 
section 24 (Seventh) of the National Bank Act, 12 U.S.C. 24(Seventh) 
Congress granted national banks the power to exercise, ``by its 
board of directors or duly authorized officers or agents, * * * all 
such incidental powers as shall be necessary to carry out the 
business of banking; by discounting and negotiating promissory 
notes, drafts, bills of exchange, and other evidences of debt; * * * 
[and] by loaning money on personal security;* * * '' Congress 
further specifically authorized national banks to engage in real 
estate lending beginning with the Act of September 7, 1916. From 
1916 to 1982, in the statutory predecessors to the present 12 U.S.C. 
371, Congress gradually broadened the scope of national bank 
authority to make real estate loans, culminating in the enactment of 
the Garn-St. Germain Depository Institutions Act of 1982 (Garn-St. 
Germain''). Prior to Garn-St. Germain, 12 U.S.C. 371 contained 
specific provisions establishing maximum loan to value ratios, 
amortization requirements, maximum loan maturity and aggregate 
limits on the amount of real estate loans a national bank could make 
or purchase. In Garn-St. Germain, Congress removed these limitations 
entirely, and gave national banks unlimited power to engage in real 
estate lending subject only to the regulations and orders 
established by the OCC. Thus, the history of national bank power to 
engage in real estate lending demonstrates Congressional intent to 
occupy the field, and to replace Congressional control over the 
terms of national banks' real estate lending with a complete 
delegation of control to the OCC as the ultimate arbiter of the 
national bank's exercise of those powers. Further, section 371 is an 
illustration of the familiar maxim of statutory construction: 
expressio unius est exclusio alterius; in that the specificity of 
the grant of authority to engage in real estate lending leaves no 
room for state law or regulation.
    Currently, section 371 provides as follows:

    Authorization to make real estate loans; orders, rules and 
regulations of Comptroller of the Currency. Any national banking 
association may make, arrange, purchase or sell loans or extension 
of credit secured by liens on interests in real estate, subject to 
section 18(o) of the Federal Deposit Insurance Act [12 USCS 1828(o)] 
and such restrictions and requirements as the Comptroller of the 
Currency may prescribe by regulation or order.\21\


    \21\ 12 U.S.C. Sec.  1828(o) authorized the OCC to establish 
uniform regulations for real estate secured extensions of credit. In 
adopting such regulations, the OCC is required to consider: the risk 
posed to the deposit insurance funds by real estate lending; the 
need for safe and sound operation of the insured institutions; and 
the availability of credit. The OCC is authorized to permit 
differing standards among the types of real estate-secured loans, as 
warranted by federal law, the risk to the federal deposit insurance 
fund, and based on considerations of institutional safety and 
soundness. Thus, Congress has instructed the OCC to exercise its 
supervisory authority over real estate lending in support of 
mandates found in federal law alone.
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    The OCC fully implemented the authority granted by Garn-St. 
Germain in 1983 by amending or removing the interpretive rulings 
regarding real estate lending that had their origins in earlier 
versions of 12 U.S.C. 371 and promulgated Part 34, which 
comprehensively defines real estate lending by national banks. Part 
34 recognizes that the forms and terms of national bank lending must 
be determined by the management of national banks themselves, to 
enable the banks to have the necessary flexibility to respond to 
market conditions. OCC regulatory authority insures that national 
banks do so prudently and in a safe and sound manner. Part 34 also 
clarifies the scope of federal preemption of state laws that could 
impact real estate lending activities by national banks.
    The pertinent regulations provide:

Sec.  34.3 General rule

    A national bank may make, arrange, purchase or sell loans or 
extensions of credit, or interests therein, that are secured by 
liens on, or interests in, real estate, subject to terms, 
conditions, and limitations prescribed by the Comptroller of the 
Currency by regulation or order.

Sec.  34.4 Applicability of State law

    (a) Specific preemption. National banks may make real estate 
loans under 12 U.S.C. 371 and Sec.  34.3 without regard to state law 
limitations concerning:
    (1) The amount of a loan in relation to the appraisal value of 
the real estate;
    (2) The schedule for the repayment of principal and interest;
    (3) The term to maturity of the loan;
    (4) The aggregate amount of funds that may be loaned upon the 
security of real estate; and
    (5) The covenants and restrictions that must be contained in a 
lease to qualify the leasehold as acceptable security for a real 
estate loan.
    (b) General standards. The OCC will apply recognized principles 
of Federal preemption in considering whether State laws apply to 
other real estate lending activities of national banks.
    The provisions of GFLA which fall within the scope of 12 CFR 
34.4(a)'s specific state law preemptions fall without need for 
further analysis. Other provisions of GFLA can be analyzed under 12 
CFR 34.4(b). OCC regulations specifically provide that the 
provisions of 12 CFR 34.4 are applicable to both national banks and 
their operating subsidiaries. See 12 CFR 34.1(b).

1. Provisions of GFLA Which Are Preempted Under 12 CFR 34.4(a)

    Taken together, the provisions of 12 CFR 34.4(a)(1)-(4) which 
remove any limits on loan to value ratios, amortization 
requirements, maturity requirements and aggregate loan limits 
preempt state laws

[[Page 8964]]

which impair a national bank or its operating subsidiary's ability 
to make any real estate-secured loan. Three aspects of GFLA run 
afoul of this preemption; the restrictions on a national bank's 
ability to refinance certain Home Loans made in the previous five 
years; the prohibition on making a High Cost Home Loan unless the 
borrower has first received counseling from a third party regarding 
the advisability of the transaction; and the prohibition on making a 
High Cost Home Loan unless the borrower meets GFLA's standards as to 
his or her ability to repay the loan. These restrictions not only 
impair National City's ability to determine the aggregate amount of 
loans it will originate in Georgia, they also impact loan to value 
ratios, amortization requirements and determination of loan 
maturity.
    GFLA's prohibition of balloon payments, negative amortization 
and advance payments from the loan proceeds are specifically 
preempted under 12 CFR 34.4(a)(2), and 12 CFR 34.4(a)(3) preempts 
GFLA's prohibition of a loan term that prevents the lender from 
accelerating a High Cost Home Loan in the exercise of its 
discretion. See OCC Unpublished Interpretive Letter dated December 
8, 1983 (preempting a Massachusetts law restricting balloon and 
demand payment terms) and OCC Unpublished Interpretive Letter dated 
May 9, 1988 (national banks are not required to amortize real estate 
loans and contrary state laws are preempted). The OCC has also held 
that all state law disclosure requirements for real estate secured 
loans are preempted. See OCC Unpublished Interpretive Letter dated 
March 30, 1988.

2. Provisions of GFLA Which Are Preempted Under 12 CFR 34.4(b)

    The five areas delineated in 12 CFR 34.4(a) are not the 
exclusive areas where federal law preempts state laws affecting 
national bank real estate lending activities. 61 FR 11294 (March 20, 
1996). Those provisions of the GFLA that are not already preempted 
under 12 CFR 34.4(a) are preempted under 12 CFR 34.4(b) either 
because they are inconsistent with the comprehensive authority 
granted to the OCC under section 371 to regulate the real estate 
lending activities of national banks or applying the conflict 
analysis in Barnett. With regard to the latter analysis, the 
provisions of GFLA which prohibit the financing of credit insurance, 
debt cancellation or suspension coverage, limit late payment charges 
and prohibit payoff and release fees for Home Loans and restrict or 
prohibit prepayment penalties, post-default interest and fees for 
modification, extension or deferral of payments for High Cost Home 
Loans would seem to ``stand as an obstacle to the accomplishment'' 
of one of the federal statute's purpose--that being the 
authorization to make real estate loans subject only to such 
restrictions and regulations as the OCC may prescribe. See Barnett 
517 U.S. 25, at 31; and 12 U.S.C. Sec.  1828(o). These provisions 
are an impermissible attempt by the state of Georgia to condition 
the exercise of national bank lending powers which are authorized by 
federal law. Bank of America, National Trust & Sav. Asso. v. Lima, 
103 F. Supp. 916 (D. Mass. 1952). GFLA's compliance provisions 
include the potential threat of litigation including uncapped 
damages and the application of the foreclosure provisions. These 
aspects of GFLA not only have more than an incidental chilling 
affect on the operations of national banks and their operating 
subsidiaries, but the compliance scheme, which includes enforcement 
by state regulators, directly conflicts with the exclusive grant of 
visitorial power to the OCC in 12 U.S.C. 484. See OCC Advisory 
Letter 2002-9.

D. Preemption of GFLA's Restrictions on the Use of Mortgage Brokers 
in the Loan Origination Process

    12 U.S.C. 24 (Seventh) and 12 CFR 7.1004 permit a national bank 
to use third party services in the organization process; this is 
restricted by the limitations contained in GFLA as a whole and 
through its impact on broker compensation.
    Section 24(Seventh) specifically authorizes national banks to 
make loans. Section 24(Seventh) also authorizes national banks to 
engage in the more general ``business of banking'' and activities 
incidental thereto. The Supreme Court has expressly held that the 
``business of banking'' is not limited to the enumerated powers in 
section 24(Seventh) and that the Comptroller therefore has 
discretion to authorize activities beyond those specifically 
enumerated. See NationsBank of North Carolina, N.A. v. Variable 
Annuity Life Ins. Corp., 513 U.S. 251, 258, n.2 (1995). An activity 
will be deemed ``incidental'' to the business of banking if it is 
``convenient or useful in connection with the performance of'' a 
power authorized under federal law. Arnold Tours, Inc. v. Camp, 472 
F.2d 427, 432 (1st Cir. 1972).
    The authority of national banks under section 24(Seventh) 
permits a national bank to use the services of agents and other 
third parties in connection with a bank's lending business. Federal 
banking regulations specifically provide that a national bank may 
``use the services of, and compensate persons not employed by, the 
bank for originating loans''. 12 CFR 7.1004(a). Likewise, the 
regulations permit national banks to utilize the services of third 
parties to disburse loan proceeds. 12 CFR 7.1003(b). These agents 
may undertake these activities at sites that are neither the main 
office nor a branch office of the bank provided the requirements of 
those regulations are satisfied. 12 CFR 7.1003(b), 7.1004(b). This 
authority applies equally to an operating subsidiary of a national 
bank. 12 CFR 7.1004(b).
    Therefore, the provisions of GFLA which have the effect of 
denying national banks and their operating subsidiaries from being 
able to use third party mortgage brokers and compensating them for 
the services they provide as permitted by federal law must be 
preempted.
    For the foregoing reasons, National City requests that the OCC 
issue a determination, and/or an order pursuant to 12 U.S.C. 371, 
that GFLA is preempted as it applies to a national bank and its 
operating subsidiaries, and further restate the long held position 
of the OCC with respect to the permitted use of third parties to 
facilitate the making of real estate loans in Georgia and elsewhere.

     Very truly yours,

Thomas A. Plant.

TAP/gs
[FR Doc. 03-4507 Filed 2-25-03; 8:45 am]
BILLING CODE 4813-33-P