Federal Preemption of State Usury Laws

[txjohn]

I hope I am in the right place. I am looking for a place to exchange and debate ideas, caselaw and theories related to Federal Preemption of State Usury Laws as defined in §1735f–7a.

I am not debating whether the federal government has authority. I stipulate to the supremacy clause.

What I wish to debate is the diverse definitions of what constitutes "interest" between the many states and how that applies to the preemption.

For example, some state usury laws prohibit cetain fees, such as late fees. Other states allow them. Other states allow and define them to be interest and included in the calculation of the annual percentage rate (APR).

However, I find substantial inconsistency and conflict with this.

TOPIC TO BE NARROW: I would like to limit this topic to be specific to Residential Mortgages and Home loans of primary dwelling or homestead. Otherwise, it is far too broad.

APPARENT CONFLICTS THAT EXIST:
1. definition of interest between states
2. "congressional intent" of the federal statute
3. co-existance and conflicts between multiple federal laws that apply to home loans, including DIDMCA, Truth In Lending Act (TILA) a title of the Consumer Credit Protection Act.

PREFACE OF EVIDENCE OF CONFLICTS:
If we assume that late fees are to be included in the definition of "interest," as has been ruled in certain caselaw decisions, then the following conflict exists:

CONFLICT #1. PART 590—PREEMPTION OF STATE USURY LAWS AUTHORITY: 12 U.S.C.1735f-7a
§ 590.3 Operation.
(c) Nothing in this section preempts limitations in state laws on prepayment charges, attorneys' fees, late charges or other provisions designed to protect borrowers.
[Codified to 12 C.F.R. § 590.3]

CONFLICT #2. PART 226—TRUTH IN LENDING (REGULATION Z)
AUTHORITY: 15 U.S.C. 1601 et se.
§ 226.4 Finance charge.
(a) Definition. The finance charge is the cost of consumer credit as a dollar amount. (b) Examples of finance charges. The finance charge includes the following types of charges, except for charges specifically excluded by paragraphs (c) through (e) of this section:
(1) Interest, time price differential, and any amount payable under an add-on or discount system of additional charges.
(c) Charges excluded from the finance charge. The following charges are not finance charges:
(2) Charges for actual unanticipated late payment, for exceeding a credit limit, or for delinquency, default, or a similar occurrence.

CONCLUSION:
TILA Regulation Z §226.4 requires that interest be included in the "Finance Charge" disclosure, but Late Fees must be excluded. If late fees have been preempted under the premise of "interest" this is an irreconcilable conflict, because interest must be calculated into the Finance Charge, but the late fee must not.
Secondly, Regulation § 590.3(c) specifically excludes late fees/charges from preemption.

THEORY:Caselaw rulings which have allowed or recognized late fees to be preempted as interest have not addressed or accounted for these significant factors which should have been given deference.

In re Hollis, Case No. 07-22759 (KCF) (Bankr.N.J. 9/17/2009)"In implementing the Truth In Lending Act, Congress authorized the Federal Reserve Board to promulgate regulations concerning the implementation of the statute including the particulars of the disclosures. 12 C.F.R. 226.4. The implementing regulations are commonly known as Regulation Z. Jeffries v. Ameriquest Mtg. Co., 543 F. Supp. 2d 368, 379 (E.D. Pa. 2008)."

"12 C.F.R. Pt. 226, Supp. I at 580 (rev. Jan. 1, 2009). The Supreme Court has instructed that "unless demonstrably irrational, Federal Reserve Board staff opinions construing the Act or Regulation should be dispositive...." Ford Motor Credit Co. v. Milhollin, 444 U.S. 555, 565 (1980)."

[flyingron]

We don't do homework.

[txjohn]

LOL. Understood, and not what I am seeking. Also, let me preface that I am NOT an attorney, nor am I a student writing a thesis. I am an interested private citizen.

I am doing my own "homework," but was interested in seeing if anyone had any opinions or thoughts on the subject. The issue is far from resolved, and therefore it isn't simply a matter of finding the proverbial "Roe v. Wade" decision that settles the matter. If so, I wouldn't be here and there wouldn't be any question other than maybe complaints for or against the "law of the land."

This subject has broad social implications, especially in light of the past several years related to foreclosures and mortgages issues in general. There is significant movement in the legislative process, both federal and state, in the areas of consumer protection, banking and lending.

Preemption effectively allows one state to legislate within another, if a state can individually define interest and subjectively apply that to a prior federal preemption statute, which may very well conflict with another soverign state and its laws on the same issue.

It seems to me that a federal definition must be perceived, since preemption is based upon the "congressional intent" of the federal legislature, not the state. And the language of the preemptive law should define the issue. Afterall, it is generally accepted that where a conflict exists between federal and state law (including application), the federal law prevails and the state must yield.

If there happens to be anyone who wishes to exchange on the subject....I would be very happy to hear it.

For those who don't wish to participate, simply NOT replying is far better than to criticize my post.

[flyingron]

States don't "preempt" each other. Sometimes a federal law preempts state law usually due to some principle related to the commerce cause. States are free to set their own interest rates. Nothing says everything has to be the same. As long as they are not in conflict with the points in the federal preemption, that's the state's right.

What on earth are you talking about in your statement of "perception" and "federal intent." In fact the federal law only prevails on state law to the extent that it is within a right that the Constitution expressly reserves to the federal governemnt.

If you want to have a discussion, you have to make specific legal points and not vague wild statements.

[antrc170]

....still reeks of homework to me.

[txjohn]

I didn't use the word "perception" so I'm not sure where that came from.

"Federal Intent" = "congressional intent" or purpose.

Wyeth v. Levine, No. 06-1249 (U.S. 3-4-2009)
"Our answer to that question must be guided by two cornerstones of our pre-emption jurisprudence. First, "the purpose of Congress is the ultimate touchstone in every pre-emption case." MEDTRONIC, INC. V. LOHR, 518 U. S. 470, 485 (1996) (internal quotation marks omitted); see Retail Clerks v. Schermerhorn, 375 U. S. 96, 103 (1963).

One state does "in effect" preempt another, through the guise of federal preemption, because of the lack of a federal definition for the term "interest" which ends up being defined subjectively state by state.

Some states define late fees as interest and others prohibits or limit these fees and/or do not define them as interest.

The Depository Institutions Deregulation and Monetary Control Act of 1980 (DIDA) preempts state usury rates. Therefore a state who defines late fees as interest effectively exports the fees to other states that do not agree, through DIDA and also the National Banking Act with doctrines of "exportation" and "most favored lender."

It is in that vein, exportation and/or preemption of interest; where interest is not federally well defined, that I was referring. One state legislature can effectively preempt another because of the subjective nature and disagreement between states on what constitutes interest.

Example: In Delaware, late fees are permissible and defined to be construed as "interest." Massachusetts does not. Therefore, Massachusetts' usury or consumer protection laws, prohibiting such fees and/or not defining them as interest, end up preempted because it is argued under preemption.

EXAMPLE:
Greenwood Trust Co. v. Com. of Mass., 971 F.2d 818 (C.A.1 (Mass.), 1992)
"On October 27, 1989, the Commonwealth of Massachusetts advised Greenwood that its imposition of late charges under such circumstances contravened state law. The Commonwealth threatened to take legal action. Greenwood promptly launched a preemptive strike, filing a complaint for declaratory and injunctive relief in the United States District Court for the District of Massachusetts. 1 The Commonwealth denied that federal law preempted the Massachusetts statute. It also counterclaimed, seeking to bar Greenwood from assessing late charges and to collect restitutionary damages, together with civil penalties, referable to Greenwood's defiance of state law......"[/INDENT][/INDENT]Federal "law" doesn't endorse or define late fees as interest. The courts do not agree universally. There is a large divide on that subject, and hair splitting. "


My narrower, original, interest related to mortgage loans and the specific requirements of lenders under TILA. Under the premises of Greenwood Trust Co. v. Com. of Mass., where late fees were accepted as interest and Massachusetts forced to yield, this appears to create a potential conflict between federal laws.

TILA requires disclosure of a "finance charge," which must include the interest, as a dollar amount or cost to the consumer.

§ 226.4 Finance charge.
(a) Definition. The finance charge is the cost of consumer credit as a dollar amount.
b) Examples of finance charges. The finance charge includes the following types of charges, except for charges specifically excluded by paragraphs (c) through (e) of this section:
(1) Interest, time price differential, and any amount payable under an add-on or discount system of additional charges.

However, at the same time TILA excludes late fees from the finance charge disclosure.

§ 226.4 Finance charge.
(c) Charges excluded from the finance charge. The following charges are not finance charges:
(2) Charges for actual unanticipated late payment, for exceeding a credit limit, or for delinquency, default, or a similar occurrence.

Therefore, if late fees are interest, and interest must be included in the finance charge, but the late fee must be excluded from the finance charge, then how can this not be a conflict?

Doesn't it stand to reason that if late fees are preempted under DIDA as interest (thus shielded from state usury laws), Lenders cannot comply with TILA which requires the disclosure of the finance charge, including all interest, but to exclude late fees from finance charges and disclose separately?

As further illustration of the misapplication of construing late fees as interest, or at least as preempted:

PART 590—PREEMPTION OF STATE USURY LAWS
AUTHORITY: 12 U.S.C.1735f-7a

§ 590.1 Authority, purpose, and scope.
(a) Authority. This part contains regulations issued under section 501 of the Depository Institutions Deregulation and Monetary Control Act of 1980, Pub. L. No. 96-221, 94 Stat. 161.

§ 590.3 Operation.
(c) Nothing in this section preempts limitations in state laws on prepayment charges, attorneys' fees, late charges or other provisions designed to protect borrowers.

FOR THE HOMEWORK THEORY: I am not asking for you to research, I am asking for your theoretical or general knowledge, to play devil's advocate with. Feel free to throw objections or doctrine at my theory, and I will do the homework and respond.

[flyingron]

Boy you are all over the place. Frankly, I doubt you'll ever understand legal concepts. A paid attorney is your best bet.

First, nothing in 226.4 is contradictory. What part of "EXCEPT FOR CHARGES SPECIFICALLY EXCLUDED" do you not understand?

As for the preemption clause, it says that this specifically DOES NOT preempt state laws, that is, it adds to them. It means that the MORE RESTRICTIVE of what is here in the federal law and whatever applies in the given state apply.

[txjohn]

Are you familiar Greenwood Trust Co. v. Com. of Mass? And it's eventual outcome on appeal?

Are you familiar with the DIDMCA & NBA and the impact of rulings, such as Greenwood?

[txjohn]

flyingron, DIDMCA and NBA do NOT create "more restrictive" laws as you suggested. They are deregulation statutes which remove state jurisdiction pursuant to federal authority under the commerce clause.

TILA, on the other hand, does create "more restrictive" consumer protections.

My discussion is about the apparent conflict between the deregulation laws and consumer protection laws.

DIDMCA and NBA remove state jurisdictions under the guise of preemption. see Greenwood Trust Co. v. Com. of Mass; see Smiley v. CitiBank.

These court rulings preempted state usury and consumer protection laws. The rulings focus on the definition of "interest" and how it can be applied to deregulation.

THE CONCLICT: Federal Deregulation (DIDMCA & NBA, etc) has been granted a very liberal and broad definition for interest. The laws have allowed national and conglomerate banks to create and charge a variety of fees that are contrary to state laws, by arguing that these fees are "interest" and therefore state law is preempted and without jurisdiction.

Federal Consumer protection (TILA, etc) appears to have a narrower definition, because it describes the specific disclosures of interest, finance charge, fees, etc.

Again, the conflict I find, is not within specific statutes themselves, but between federal deregulation caselaw vs. consumert protection statues.

[KeyWestDan]

And so what? What exactly is your point and why should anyone care?