Is That State Law Preempted? A Look at NCUA Rules and Legal Opinion Letters
With some credit unions looking at NCUA's new field of membership provisions and considering what type of charter works best for them, we receive the occasional question about preemption of state law. After all, one potential benefit of a federal charter can be the preemption of state law, depending on the circumstances.
As a starting point, what is "preemption" anyway? This is the general legal principle that in some cases, federal law is "controlling over state laws and/or preclude[s] the state from enacting laws on the same subject…" While this can become complex quickly, the Federal Credit Union Act contains a preemption provision that is addressed in part of the lending rule; here's an excerpt:
“(b) Relation to other laws—
(1) Preemption of state laws. 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 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:
(A) Rates of interest and amounts of finance charges, including:
(1) The frequency or the increments by which a variable interest rate may be changed;
(2) The index to which a variable interest rate may be tied;
(3) The manner or timing of notifying the borrower of a change in interest rate;
(4) The authority to increase the interest rate on an existing balance;
(B) Late charges; and
(C) Closing costs, application, origination, or other fees;
(ii) Terms of repayment, including:
(A) The maturity of loans and lines of credit;
(B) The amount, uniformity, and frequency of payments, including the accrual of unpaid interest if payments are insufficient to pay all interest due;
(C) Balloon payments; and
(D) Prepayment limits;
(iii) Conditions related to:
(A) The amount of the loan or line of credit;
(B) The purpose of the loan or line of credit;
(C) The type or amount of security and the relation of the value of the security to the amount of the loan or line of credit;
(D) Eligible borrowers; and
(E) The imposition and enforcement of liens on the shares of borrowers and accommodation parties."
The rule goes on to address specific areas of state law that are not preempted:
"(2) Matters not preempted. Except as provided by paragraph (b)(1) of this section, it is not the Board's intent to preempt state laws that do not affect rates, terms of repayment and other conditions described above concerning loans and lines of credit, for example:
(i) Insurance laws;
(ii) Laws related to transfer of and security interests in real and personal property (see, however, paragraph (g)(6) of this section concerning the use and exercise of due-on-sale clauses);
(iii) Conditions related to:
(A) Collection costs and attorneys' fees;
(B) Requirements that consumer lending documents be in “plain language;” and
(C) The circumstances in which a borrower may be declared in default and may cure default.”
Overall, preemption is a rather complex topic and the parameters of when a state law is considered preempted can be rather fact-specific. NCUA has issued numerous legal opinion letters on preemption, here are a few examples for reference:
Determining whether a specific law is preempted may require consulting with counsel, particularly where there is not a legal opinion letter from NCUA on the matter.
Compliance officers researching preemption, field of membership and other issues associated with federal charters may spend a lot of time digging for NCUA guidance. Those looking for a shortcut in their research might be interested in NAFCU's Credit Union Compliance 101 Manual. The Manual contains helpful indexes of NCUA's Legal Opinion Letters and Letters to Credit Unions, as well as research tips and other quick-reference research charts.
About the Author
Brandy Bruyere, NCCO was named vice president of regulatory compliance in February 2017. In her role, Bruyere oversees NAFCU's regulatory compliance team who help credit unions with a variety of compliance issues.