The Office of Thrift Supervision issued a letter finding that amendments to the Code of Montgomery County, Maryland (“Code”) that purport to prohibit certain lending practices for federal savings associations are preempted as to federal savings associations and their operating subsidiaries. OTS Letter from John E. Bowman, Chief Counsel (March 7, 2006). Additionally, the letter states that the OTS is the only governmental entity with authority to examine for violations of and enforce any other provisions of the Code that may be applicable to federal savings associations and their operating subsidiaries.

    The provisions of the Code considered by the OTS prohibit making available a mortgage loan that: (1) includes the financing of single premium credit life insurance; (2) provides for excessive upfront points, excessive fees or excessive prepayment penalties; or (3) provides compensation paid directly or indirectly to a person from any source. The OTS noted that it has repeatedly opined that such state laws are preempted for federal savings associations and their operating subsidiaries, including letters addressing similar laws in Georgia, New York, New Jersey and Nevada. The OTS stated that the same preemption principles are equally applicable to the preemption of local laws and to preemption for federal savings association operating subsidiaries.

    In finding the local law preempted, the OTS summarized the preemption authority found in the Home Owners’ Loan Act, 12 U.S.C. §§ 1461 et seq., 12 C.F.R. § 560.2 and prior OTS letters interpreting these provisions. The OTS stated that it occupies the field of the regulation of the operations of federal savings associations, including their lending operations, to enhance safety and soundness and enable federal savings associations to conduct their operations in accordance with best practices by efficiently delivering law-cost credit to the public free from undue regulatory duplication and burden.

    The OTS explained that while the letter does not address other provisions of Chapter 27-12 of the Code, to the extent that other provisions may be applicable to federal savings associations or their operating subsidiaries, Montgomery County may not take action against these entities. The OTS stated again that the OTS has comprehensive and exclusive authority to enforce laws against federal savings associations and their operating subsidiaries.

    In a related matter, the Montgomery County Circuit Court granted the request of the American Financial Services Association for a preliminary injunction to stay the effective date of Montgomery County’s Mortgage Lending Ordinance. The court held that the new ordinance cannot go into effect until “notice of the court” is given. A hearing in the case is scheduled for July 6, 2006.

    Jeff Langer and Elizabeth Anstaett