When States Pass Laws the Banks Don’t Like

In many countries there aren’t any long-term mortgages, either because local law makes it difficult to foreclose on a house, or else because of the very real risk that local laws will change and make it difficult to foreclose on a house. The latter is essentially legislation risk, and it’s something that every bank needs to be aware of.

Unfortunately, US banks seem to have forgotten all about legislation risk, until now. It turns out that foreclosure law is set by the states, not by the federal government – and that a number of states are talking about passing laws which will make it very hard for banks to foreclose on properties.

The banks don’t like this, of course. But they’re bound by state law on such matters, and there isn’t any federal foreclosure law, so they’re taking their lumps with equanimity they’ve decided that they’re going to try to rewrite the law on the fly.

There’s this wonderful doctrine called pre-emption, you see, which is used by national credit-card companies and which says that nationally-regulated banks don’t need to worry about state laws, they can just answer to federal regulators and obey federal rules. So the banks’ latest bright idea is that they can do the same thing with foreclosure, even though there aren’t any federal foreclosure rules or regulations.

Of course, this would apply only to nationally-chartered banks. But any local bank wanting to foreclose could simply sell its broken loan to a national bank and get around the state laws that way. Essentially, all state foreclosure laws would be rendered toothless overnight if banks successfully pre-empt state laws.

Fortunately, a pair of Congressmen – Brad Miller (D, NC) and Steve LaTourette (R, OH) – are introducing a bill which will stop the pre-emption racket. As Elizabeth Warren puts it:

If banks don’t like the state laws, they remain free to fight them in the state legislatures or the state courts. They can even make constitutional arguments about takings. But congressmen Miller and LaTourette say they can’t claim that Congress gave them a free pass.

There’s really no reason why national banks should have more free rein to foreclose than local banks, in any state. So with luck the Miller-LaTourette bill will pass. But expect the vote to be close: the financial services industry has a lot of clout in Washington.

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