OCC: Bank Preemption from COVID-19 Relief Programs

OCC Bulletin 2020-62| June 17, 2020

Summary

Federal, state, and local governments have taken many actions to respond to the economic disruption caused by the spread of COVID-19. While the Office of the Comptroller of the Currency (OCC) recognizes that a wide range of stakeholders, including state and local governments, have an important role to play in the country’s COVID-19 response, the agency reminds stakeholders that banks1 are governed primarily by uniform federal standards.

This bulletin applies to community banks.

Highlights

  • Many state and local authorities have taken, or are considering taking, legislative, executive, or other action to respond to the economic disruptions caused by the spread of COVID-19.
  • While the specifics of each state or local action vary, many address foreclosure and repossession moratoriums, loan forbearance, and limitations on the interest and fees banks may charge. These actions may also require banks to report related information to state or local officials and include penalties for violations of these requirements.
  • The OCC recognizes the importance of prudent and proactive efforts to assist individuals affected by the COVID-19 emergency and has strongly encouraged banks to work with affected customers. As the OCC has noted, prudent arrangements can ease cash flow pressures on affected borrowers, improve their capacity to service debt, increase the potential for financially stressed residential borrowers to keep their homes, and facilitate banks’ ability to collect on their loans.2
  • Congress also recognized the importance of these efforts by including specific provisions in the Coronavirus Aid, Relief, and Economic Security (CARES) Act to address forbearance on federally backed mortgage loans and moratoriums on related foreclosures.3 These provisions strike a careful balance between helping affected borrowers in the short term and preserving credit availability and affordability for other borrowers that would be curtailed by indefinite measures that impair banks’ security interests.
  • While these state and local actions are well-intended, the OCC is concerned that the proliferation of a multitude of competing requirements will conflict with banks’ ability to operate effectively and efficiently, potentially increasing the risk to banks’ safety and soundness and ultimately harming consumers.
  • In light of this concern, the OCC reminds stakeholders that banks are governed primarily by uniform federal standards and generally are not subject to state law limitations.
  • Federal preemption derives from the Supremacy Clause of the U.S. Constitution. It permits banks, many of which operate across state lines, to achieve efficiencies associated with operating under a uniform set of rules. As the Supreme Court has noted, federal legislation and regulation “has in view the erection of a system extending throughout the country, and independent, so far as powers conferred are concerned, of state legislation which, if permitted to be applicable, might impose limitations and restrictions as various and as numerous as the States.”4
  • Therefore, federal law preempts state and local laws that impermissibly conflict with banks’ exercise of federally authorized powers under the standard set forth in Barnett Bank of Marion County, N.A. v. Nelson.5 Consistent with this standard, OCC regulations provide examples of the types of state laws that do not apply to banks’ lending and deposit-taking activities.6 These include state law limitations on: terms of credit, such as the schedule for repayment and interest, amortization of loans, balance, payments due, minimum payments, and term to maturity; disbursements and repayments; and processing, origination, and servicing mortgages.7 OCC regulations also address interest and non-interest fees.8
  • OCC regulations preempt state laws that conflict with the real estate lending powers of banks and specifically preempt state laws that interfere with banks’ ability to make mortgage loans secured by real estate.9 State action that limits banks’ ability to foreclose on a defaulted loan and take possession of collateral, beyond what is provided for in the CARES Act, would interfere with banks’ powers to make secured mortgage loans.10
  • In addition, as provided by statute, set forth in OCC regulations, and recently reiterated in OCC Bulletin 2020-43, the OCC has exclusive visitorial authority with respect to banks.11 Requirements to report to state and local officials generally run afoul of this exclusive authority.
  • Because each state or local action presents unique considerations, the OCC recommends that banks consult with counsel to determine the applicability of any particular state or local law. Banks and their counsel may also contact the OCC with questions.

Consistent with these principles of federal preemption, the OCC encourages states and localities to expressly exempt federally chartered banks from their laws and invites states and localities to reach out to the OCC with any concerns.

Further Information

Please contact Andra Shuster, Senior Counsel, Karen McSweeney, Special Counsel, or Priscilla Benner, Senior Attorney, Chief Counsel’s Office, at (202) 649-5490.

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