Fourth Circuit Court of Appeals Holds the National Bank Act Does Not Preempt State Debt Collection Laws
On April 5, 2012, the United States Court of Appeals for the Fourth Circuit held that the Maryland Credit Grantor Closed End Credit Provisions (CLEC) that regulate debt collection of non-real estate loans are not preempted by the National Bank Act (NBA). The Court also found that an express election of the CLEC in a retail installment contract (RIC) between plaintiff consumer and defendant bank was enforceable and constituted basis for a breach of contract claim against defendant.
In her putative class action, plaintiff alleged that, after defendant bank repossessed her car, defendant failed to notify her of the location of the vehicle or the time and place where it was to be sold, as required by CLEC. Defendant argued that the CLEC repossession provisions are preempted by 12 C.F.R. § 7.4008(d), which provides that “a national bank may make non-real estate loans without regard to state law limitations concerning … disclosure and advertising … in credit-related documents.” The District Court granted defendant bank’s motion to dismiss holding that the relevant portions of CLEC were preempted by the NBA and its implementing regulations promulgated by the Office of the Comptroller of the Currency (OCC).
The Court of Appeals disagreed emphasizing that “although debt collection and extension of credit are related, they are distinct concepts.” Repossession is a power granted to lenders pursuant to state laws – here, CLEC - not by the NBA and there is no OCC provision that expressly preempts application of debt collection laws. In addition, recognizing this evident distinction between lending and debt collection, the Court of Appeals concluded that the CLEC does not “obstruct, impair, or condition” defendant bank’s exercise of its federally authorized powers to extend credit.
The Court further determined that the savings clause contained in 12 C.F.R. § 7.4008(e) preserves from preemption state laws concerning debt collection. Section 7.4008(e) provides that state laws regarding “rights to collect debts” are “not inconsistent with the non-real estate lending powers of national banks and apply to national banks to the extent that they only incidentally affect the exercise of national banks’ non-real estate lending powers.” The Court rejected defendant’s argument that the CLEC more than incidentally burdens the exercise of defendant’s lending power and stressed that post default debt collection is distinct from creditor’s initial determination to extend credit. Under defendant’s theory, any state debt collection regulation would burden of the exercise of a national bank’s lending power and would be invalid as applied to such banks.
The Court also held that the RIC, which expressly provided that it shall be subject to the CLEC, was enforceable against defendant bank as a matter of law. Defendant argued that it did not draft or negotiate the RIC at issue and, therefore, defendant should not be bound by the election of the CLEC. The Court rejected this argument noting that the CLEC is only mandatory to the extent the parties to a lending agreement agree to be bound by the CLEC. Defendant bank could have chosen to be governed by the Maryland Retail Installment Sales Act (RISA). Instead, defendant purchased a RIC that elects the CLEC, sought higher late fees from plaintiff (as authorized by CLEC), and, upon breaching the RIC by failing to comply with the CLEC notice provisions, claimed the election of the CLEC was void. The Court would not allow this and revived plaintiff’s claim for breach of contract.
The impact of this important decision may have a reach beyond cases involving non-real estate loans. OCC preemption provisions that apply to real-estate loans are identical to the ones regulating non-real estate lending powers. Accordingly, the NBA preemption defense in cases involving home loans and other real-estate loans should be carefully monitored to see if and how they will be impacted by this decision.
A copy of the court’s opinion is attached here. Epps v. JP Morgan Chase Bank, N.A., No. 10-2444 (4th Cir. April 5, 2012).
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