When are state laws preempted?
The news that Wells Fargo entered into a $4 million consent decree with NYS’s Department of Financial Services typically wouldn’t be blog worthy. After all, $4 million ($2 million fine and $2 million in restitution to 1,300 NY Consumers) is cushion change for your average mega bank and by some measures Wells Fargo is the biggest of the Big. But when the settlement involves one of the most unique operational constraints placed on New York State chartered financial institutions and touches on how and when state laws are preempted, it is worth taking a look at.
Section 413 of NYS’s Personal Property Law prohibits the use of credit cards secured by real property. As a result, state chartered institutions, including credit unions, are prohibited from offering HELOCS that can be accessed with cards with credit features, as explained in this legal opinion letter from the Department of Financial Services.
New York’s prohibition against credit card HELOCS is arguably the most significant operational difference between state and federal credit unions. NCUA has clearly preempted such laws as applied to federal credit unions. For example, this opinion letter from NCUA noted that a Connecticut law that banned HELOC credit cards was preempted by federal law. As the letter explained:
“NCUA’s lending regulation expressly recognizes that FCUs are subject to state law in certain matters, including insurance laws, issues related to the establishment and transfers of security interests, issues of default and so forth. 12 C.F.R. §701.21(b)(2). The Connecticut statute is not within the area of permissible regulation by the states because it affects conditions related to the purpose of the loan and the distribution of loan proceeds. ” RE: PREEMPTION OF CONNECTICUT OPEN-END MORTGAGE LAW, 2002.
What caught my eye about the settlement and has sent me scrambling through the legal opinion letters is that Wells Fargo is a nationally chartered Bank. Why would it be subject to New York’s Personal Property Law? As it turns out, Wells Fargo had brought the line of business from a non- bank entity that wasn’t federally chartered.
The bottom line: federally chartered institutions are no more subject to New York’s HELOC prohibition today than they were yesterday but if you are state chartered, the state is serious about enforcing its HELOC limitations. If you are a federal charter don’t assume that the exemptions that apply to your credit union automatically apply to your CUSOs.
Law and Order NY Style
For political junkies our morning political blogs are reading more like crime blotters.
Fresh on the heels of the Silver indictment former Senate Majority Leader Malcolm Smith was found guilty of trying to bribe his way onto the ballot as a Republican in his still-born run for NYC Mayor in last year’s election. His successor, John Sampson is awaiting trial. Meanwhile a $580,000 settlement involving alleged sexual harassment of staffers by former Assemblyman Vito Lopez has been reached. Taxpayers will be on the hook for $545,000 of the settlement.