The Office of Thrift Supervision made clear recently that it retains the primary role in regulating the lending activities of federal thrifts by pre-empting a restrictive California consumer protection statute which affects advertising, the forced placement of hazard insurance, and charging of certain loan-related fees.

At the same time, four other recent OTS letters dealing with preemption of state law issues have surfaced. One deals with electronic banking in Massachusetts, a second deals with payment of finders fees in Illinois, and a third with paying interest on escrow accounts in New York. A fourth deals with mortgage reinsurance. The Office of the Comptroller of the Currency has dealt with a similar issue by allowing banks to reinsure through an operating subsidiary a portion of the risk on mortgages they originate.

While the most recent decision is important for all types of thrift lending, it is especially important to thrifts serving as mortgage lenders because California is the nation’s largest consumer mortgage market.

The agency’s letter was dated March 10 but only came to light last week. The name of the institution which requested the interpretation was redacted.

The OTS ruling dealt with the California Unfair Business Practices Statute and the California Deceptive, False, and Misleading Advertising Statute. In its request to the OTS, the thrift highlighted several examples of how the consumer protection laws were being used to impose substantive limitations on its lending activities. In its pre-emption letter, the OTS said that the Home Owners Loan Act provides the OTS broad authority to regulate all aspects of the operations of thrifts.

Of greater concern is that, according to the letter, California courts interpreting the laws have found that a cause of action under the law can be sustained on a finding of "unfairness," not by a breach of contract, or a violation of real property, commercial or tort law.

The OTS said in its letter that it has the authority to pre-empt certain laws affecting thrift lending if the law has more than an "incidental impact" on lending. Applying these provisions, the OTS determined that the practical application of the state laws as a basis for alleging "unfair competition" creates more than an incidental impact on the thrift’s lending operations, and thus that application of those laws is preempted.

According to a Washington lawyer, the OTS emphasized the extremely limited nature of its preemptive determination, referencing a 1996 determination with respect to an Indiana law not deemed to be preempted by federal law. That law principally required that advertisements be accurate.