Bankruptcy

Banks: State Laws Not for Us

By Elizabeth Warren

Just when you think the mortgage mess can't get any worse, the banks come up with a new idea: They shouldn't have to obey state law when they foreclose on someone's home. 

Pre-emption has been a gravy train for the national banks, insulating their credit card business from state laws. Some banks now want another ride on the pre-emption train, claiming that they shouldn't have to follow local foreclosure laws when they take people's homes.

Tomorrow Congressmen Brad Miller (D, NC) and Steve LaTourette (R, OH) will introduce HR 5380 to make it clear that the banks have to follow the state law foreclosure laws, just like they always have. Amazingly, this is expected to be a close vote. 

HR 5380 is a small, but smart piece of legislation.  It says that if the states want to pass laws to deal with the current foreclosure crisis, then they are free to do so.  In other words, this bill says that Congress may not be ready to fix the crisis, but it will at least stay out of the way so that the states can do so. 

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.

Since the founding of this country, foreclosure laws have been the special province of the state.  In the same way that they set up the basic rules of property law and property transfer, states decide the terms on which people could be thrown out of their homes or off their farms by the mortgage lender. There are no federal foreclosure laws.  Any mortgage holder--including a national bank or thrift--must abide by the terms of the state's foreclosure laws.   

But in the past few weeks, national banks have started making a new argument:  state laws are pre-empted whenever a national bank holds the mortgage, so the states can't make them follow the local rules. Pre-emption has been used successfully by the credit card companies to fight off state regulation, so now the banks want to escape local restrictions on foreclosure as well.

The scope of this argument is stunning.  Because there is no federal foreclosure law, would the banks be free to do whatever they wanted?  Could they simply order families out of their homes?  Would federally-charted banks start buying up troubled loans from other banks, then doing their own vigilante expulsions?

And if the argument works here, where else does it work?  Are the banks free to flaunt all state laws?

Congress has not acted swiftly to help homeowners.  The bankruptcy amendments that would provide real relief to the most troubled families is stalled.  But here's a step Congress can take quickly: They can tell the banks that the federal pre-emption gravy train is not taking on any new passengers. 

Full post as published by Credit Slips on May 06, 2008 (boomark / email).