BANKING REPORT! A s the effects of instability in the financial markets. A BNA s. Preemption Decisions a Key to Future Subprime Litigation?

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1 A BNA s BANKING REPORT! 2007 Financial Institutions Litigation Update Preemption Decisions a Key to Future Subprime Litigation? THOMAS P. VARTANIAN, DANIEL E. LOEB, AND DOMINIC A. ARNI A s the effects of instability in the financial markets and the subprime mortgage crisis are felt throughout the United States, financial institutions will face heightened scrutiny by federal and state regulators, as well as potential civil lawsuits. In response, the courts will increasingly be the forum for disputes regarding the exposure of financial institutions to regulatory enforcement actions, shareholder lawsuits, and a myriad of mortgage securitization controversies over underwriting, representations, recourse arrangements, and back-stop/insurance exposures. But in 2007, characteristically reflecting the expansion-minded efforts of financial institutions in a more accommodating market, the centerpiece of litigation in the federal courts focused on the ability of federally-chartered institutions and their non-bank subsidiaries to rely upon federal preemption to defeat enforcement actions by state regulators and claims brought by civil litigants under state law. Building upon prior jurisprudence, federal court decisions handed-down in 2007 and early 2008 further delineated the preemptive power of federal law and provided guidance regarding the categories of state-law claims that the federal banking laws and regulations preempt. The federal courts preemption rulings will assume particular importance in 2008 and beyond, as financial institutions grapple with a cacophony of challenges raised by the subprime mortgage crisis. Reining in State Authority Over Federal Institutions, Subsidiaries A key element of the evolution of regulation of federally-chartered financial institutions over the last 10 years has been the increasing trend of Attorneys General to take a more proactive role in interpreting and prosecuting state laws. This trend has been no more visible than in the financial services business, where state authorities naturally read state statutes that apply to companies doing business in and offering products and services to the customers of their states as applying to those companies. In the financial services arena, this generally involves several important areas of regulation and consumer protection: licensing and registration, usury, fees, and examination. This trend hit a crescendo with the disposition of the most significant federal court decision in this area the Supreme Court s highly-anticipated decision in Watters v. Wachovia Bank, N.A. 1 in April of That case addressed the application of a Michigan law requiring mortgage lenders to register with Michigan s Office of Insurance and Financial Services ( OIFS ), pay an annual fee to the State, file an annual report, and allow their books and records to be inspected by OIFS examiners. 2 Wachovia Mortgage, a wholly-owned operating subsidiary of Wachovia Bank, N.A., and its mortgage lending business became the target of this law with regard to Wachovia Mortgage s lending activities in Michigan S. Ct (2007) (88 BBR 708, 04/23/07) 2 See id. at Messrs. Vartanian and Loeb are partners and Mr. Arni is an associate in the Washington, D.C. office of Fried, Frank, Harris, Shriver & Jacobson LLP. The authors regularly represent clients with regard to bank enforcement and litigation matters. Reproduced with permission from BNA s Banking Report, Vol. 90, No. 12, 3/24/2008, pp Copyright 2008 by The Bureau of National Affairs, Inc. ( ) COPYRIGHT 2008 BY THE BUREAU OF NATIONAL AFFAIRS, INC. ISSN

2 2 The federal courts preemption rulings will assume particular importance in 2008 and beyond, as financial institutions grapple with a cacophony of challenges raised by the subprime mortgage crisis. Prior to becoming a wholly-owned operating subsidiary of Wachovia Bank in 2003, Wachovia Mortgage complied with Michigan s requirements. Shortly after becoming an operating subsidiary of the bank on January 1, 2003, Wachovia Mortgage surrendered its mortgage lending registration to OIFS. OIFS subsequently informed Wachovia Mortgage that, without registration, it could not engage in mortgage lending in Michigan. Wachovia Mortgage and Wachovia Bank subsequently filed a lawsuit seeking declaratory and injunctive relief, arguing that the National Bank Act ( NBA ) and regulations promulgated thereunder preempted Michigan s regulatory scheme. 3 The United States District Court for the Western District of Michigan granted summary judgment in favor of Wachovia and the United States Court of Appeals for the Sixth Circuit affirmed. Writing for the majority in a narrow 5-3 decision, 4 Justice Ginsberg affirmed the circuit court s ruling, holding that a national bank s mortgage business, regardless of whether it is conducted by the bank or its operating subsidiary, is subject to supervision by the Office of the Comptroller of the Currency ( OCC ), but not to any licensing, reporting, and visitorial regimes of any State in which the bank or its subsidiary operate. 5 The majority observed that [n]early two hundred years ago, in McCulloch v. Maryland,...[the Supreme] Court held federal law supreme over state law with respect to national banking, 6 and that the NBA granted the OCC the authority to oversee the operations of national banks and their interactions with customers. 7 The majority explained that the Supreme Court had repeatedly made clear that federal control shields national banking from unduly burdensome and duplicative state regulation. 8 That is not to say that state laws would never apply to national banks. To the contrary, the majority emphasized that federally-chartered banks may be subject to state laws of general applicability to the extent such laws do not conflict with the letter or the general purposes of the NBA. 9 Thus, States may regulate the activities of national banks and their subsidiaries if such regulation would not significantly interfere with, or prevent the national 3 See id. 4 Justice Stevens filed a dissenting opinion in which Chief Justice Roberts and Justice Scalia joined. Justice Thomas did not take part in the decision. 5 Id. at Id. at 1566 (citations omitted). 7 Id. at 1564 (citations omitted). 8 Id at Id. at bank or federal regulators from exercising, their enumerated or incidental powers under the NBA. 10 The majority noted that examples of state laws that might not be preempted by federal banking laws and regulations include certain state usury, contract and property laws. 11 The majority then held that the NBA and OCC regulations preempt States efforts to exercise visitorial control over national banks real estate lending activities because the NBA vested those powers exclusively in the OCC. 12 Under OCC regulations, those visitorial powers include: (i) [e]xamination of a bank; (ii) [i]nspection of a bank s books and records; (iii) [r]egulation and supervision of activities authorized or permitted pursuant to federal banking law; and (iv) [e]nforcing compliance with any applicable federal or state laws concerning those activities. 13 The majority further held that, except where otherwise provided by federal law, operating subsidiaries of banks that exercise the powers of national banks are equivalent to national banks for preemption purposes. Although state law governs the formation, dissolution, and internal governance of such operating subsidiaries, like national banks themselves, their operating subsidiaries may not be subjected to audits or surveillance by state regulators. 14 In contrast, other bank affiliates that engage in non-banking financial activities, including securities and insurance, may be subject to state regulation. 15 In December 2007, the United States Court of Appeals for the Second Circuit similarly addressed the federal preemption of state regulatory actions against national banks in The Clearing House Association, LLC v. Cuomo. 16 That case arose out of former New York State Attorney General Elliot Spitzer s 2005 investigation of national banks purported racial discrimination in their residential real estate lending practices. 17 In connection with the Spitzer investigation, the Attorney General sent inquiry letters to mortgage lenders and their operating subsidiaries, including Citigroup, J.P. Morgan Chase, HSBC and Wells Fargo, requesting that they produce non-public information regarding their mortgage lending policies and practices, as well as data relating to certain loans. The OCC and The Clearing House Association, a group of national banks, filed separate suits to enjoin the Attorney General s investigation, arguing that the NBA and OCC regulations preempted state regulatory efforts. The Attorney General counterclaimed, asserting that the relevant OCC regulation violated the requirements of the Administrative Procedures Act. The district court held in favor of the OCC and The Clearing 10 See id. 11 See id. 12 See id. at 1568 (citing 12 U.S.C. 484(a)). 13 See id. at (quoting 12 C.F.R (a)(2)). 14 Id. at See id. at F.3d 105 (2d Cir. 2007). Clearing House was the subject of a news report in BNA s Banking Report. See R. Christian Bruce, Federal Appeals Court Upholds OCC Rules Barring New York Attorney General s Probe, BNA S BANKING REPORT, vol. 89, no. 22 (Dec. 10, 2007), at p. 970 (89 BBR 970, 12/10/07). 17 Similarly, Mr. Spitzer s successor, New York Attorney General Andrew Cuomo, has recently taken up the cause of investigating the activities of financial institutions with regard to the origination and securitization of mortgages COPYRIGHT 2008 BY THE BUREAU OF NATIONAL AFFAIRS, INC. BBR ISSN

3 3 House Association, and the Attorney General appealed. 18 In a 2-1 decision, a panel of the Second Circuit affirmed the district court s order. The Second Circuit recognized that Congress granted the OCC broad authority to promulgate rules and regulations to carry out its responsibilities, and observed that the NBA provides that national banks are not subject to any visitorial powers except as authorized by Federal law [or] vested in the courts of justice. 19 Like the Supreme Court in Watters, the Second Circuit observed that the OCC s regulations provide that the exercise of visitorial powers over national banks is vested solely in the OCC and set forth a nonexclusive list of the OCC s visitorial powers. 20 After analyzing the deference to be afforded to the OCC s interpretation of the NBA and discussing the Watters decision, the court held that the OCC s preemption regulation is not arbitrary or otherwise not in accordance with law. Rather, the OCC s regulation is a reasonable, permissible interpretation of the NBA and furthers Congress s goal of shielding national banks from burdensome and duplicative regulation by the States. 21 Thus, the Second Circuit held that the NBA and OCC regulations preempt the New York Attorney General s investigative efforts relating to the banks real estate lending powers. 22 The court noted, however, that state regulators retain the power to enforce a wide range of laws that do not purport to regulate a national bank s exercise of its authorized banking powers, and that OCC regulations do not preempt state laws that do not conflict with those powers. 23 Through Watters and Clearing House, the courts confirmed that federal law and OCC regulations prevent national banks and their operating subsidiaries from being subjected to conflicting, burdensome regulation of their federal banking powers by both federal and state governments. This does not mean that national banks or other federally-chartered financial institutions are shielded from all regulatory enforcement actions. 24 Indeed, both Watters and Clearing House emphasize the OCC s exclusive powers of examination and inspection with respect to banking activities authorized by the NBA. While those decisions may limit national banks exposure to duplicative investigations and enforcement actions, such banks should anticipate that the OCC will vigorously exercise its exclusive visitorial authority. Furthermore, both Watters and Clearing House recognize that federal law does not preempt all efforts by States to enforce laws of general applicability against national banks but, rather, such enforcement actions are preempted only if they would interfere with the 18 See Clearing House, 510 F.3d at Id. at 111 (quoting 12 U.S.C. 484(a)). 20 Id. (quoting 12 C.F.R ). 21 See id. at The Second Circuit also held that The Clearing House Association s claim that New York s Attorney General could not enforce the federal Fair Housing Act was not ripe for adjudication. See id. at Id. at While beyond the scope of this article, there are varying degrees of precedent in this area with regard to other federally-chartered entities, such as the Federal Reserve Banks, Federal Home Loan Banks, Fannie Mae, Freddie Mac, and the Federal Farm Credit Banks. business of banking or would conflict with federal law or regulations. 25 Civil Lawsuits Based on State Law Causes of Action In addition to limiting the applicability of state laws to federally-chartered financial institutions and their subsidiaries, in 2007 and early 2008, federal courts also held that federal law and regulations preempt certain state-law claims brought by plaintiffs against federallysupervised financial institutions. This is particularly significant as states enhance their efforts to zealously protect their residents through the application of unfair and deceptive acts and practices ( UDAP ) statutes, and as the federal banking agencies look to plow that same ground, in some instances, by promulgating their own UDAP regulations. National Banks Many of the federal courts recent preemption decisions have involved claims brought under California s Unfair Competition Law ( UCL ), 26 a broad consumer protection statute that creates causes of action based on violations of other laws and regulations. For example, in April of 2007, in Augustine v. FIA Card Services, N.A., 27 the United States District Court for the Eastern District of California held that federal law and regulations preempted claims that a credit card provider violated the UCL by retroactively increasing the interest rates that it charged customers who defaulted on their accounts and by inadequately disclosing its process for deciding whether to impose such increases. 28 In dismissing the plaintiff s claims, the court held that OCC regulations allowing card issuers to make loans without regard to state laws governing allowable interest rates and terms of credit preempted the plaintiff s claim regarding FIA s rate increases. As in Watters and Clearing House, the court in Martinez clarified that the NBA and OCC regulations do not preempt all potential claims against national banks under the UCL. The court found that the plaintiff s claim merely sought to alter the parties preexisting terms of credit and did not allege that FIA had breached the parties contract. In addition, the court held that an OCC regulation granting national banks the power to make loans without regard to state disclosure requirements expressly preempted the plaintiff s claim that FIA violated 25 Watters, 127 S. Ct. at Cal. Bus. & Prof. Code et seq F. Supp. 2d 1172 (E.D. Cal. 2007). 28 See id. at The plaintiff also claimed that FIA s conduct was an unfair and deceptive practice under California s Consumer Legal Remedies Act ( CLRA ). The court dismissed that claim because the plaintiff failed to plead facts supporting her misrepresentation claim and because the CLRA does not apply to credit card transactions. See id. at BANKING REPORT ISSN BNA

4 4 the UCL by failing to make disclosures beyond those required by federal law. 29 Similarly, in July of 2007, in Martinez v. Wells Fargo Bank, N.A., 30 the United States District Court for the Northern District of California held that the NBA and OCC regulations preempted claims that Wells Fargo violated the UCL by charging excessive fees for settlement services related to its home mortgage loans and violated California Civil Code 1572 by failing to disclose to borrowers the actual costs of its settlement services. In granting Wells Fargo s motion to dismiss the complaint, the court noted that the NBA grants national banks the express power to engage in real estate lending and the incidental power to set interest rates and other charges and fees. 31 The court also recognized that the OCC s regulations preempt state laws that conflict or interfere with those banking powers. 32 The court observed that OCC regulations govern national banks determinations regarding the charges and fees that they apply to their real estate loans, and provide factors for national banks to consider in making those determinations. Citing Watters, the court held that the OCC has exclusive regulatory authority over national banks adherence to those regulations. Thus, the court held that the NBA and OCC regulations preempted the plaintiffs claim that Wells Fargo violated the UCL by engaging in unfair and deceptive business practices with respect to its settlement fees. 33 The court also dismissed the plaintiffs claim that Wells Fargo violated California law by failing to disclose the actual costs of its settlement services, holding that OCC regulations, which do not require banks to disclose such costs, preempt California s additional disclosure requirements. 34 As in Watters and Clearing House, the court in Martinez clarified that the NBA and OCC regulations do not preempt all potential claims against national banks under the UCL. The court explained that such claims are preempted only to the extent that they significantly interfere with a national bank s banking powers or with the OCC s exclusive regulatory authority See id. at (citing 12 C.F.R (d)(2)(iv), (viii), (x)). The plaintiff has appealed the district court s ruling to the United States Court of Appeals for the Ninth Circuit. 30 No. C RMW, 2007 WL (N.D. Cal. July 31, 2007). 31 Id. at*3(quoting12u.s.c. 371). 32 See id. 33 See id. at* See id. at *6. The plaintiffs have appealed the district court s ruling to the Ninth Circuit. 35 See id. at*5n.6. The court observed that, through the NBA, Congress explicitly granted to national banks the power to loan money on personal security, which was the power that Chase had exercised in extending credit through its convenience checks. In Montgomery v. Bank of America Corp., 36 another decision regarding California s consumer protection laws, the United States District Court for the Central District of California dismissed on preemption grounds a lawsuit alleging that Bank of America violated California law by imposing on accountholders unjustified and harsh overdraft fees, which it failed to adequately disclose. 37 The court granted Bank of America s motion to dismiss, holding that the NBA and OCC regulations, which grant national banks the power to set such fees, preempted the plaintiff s claims challenging both the amount of and the process for setting those fees. 38 The court also held that an OCC regulation providing that [a] national bank may exercise its deposit-taking powers without regard to state law limitations concerning-... disclosure requirements 39 preempted the plaintiff s state-law disclosure claims. This trend of preemption decisions continued in January of 2008 with Rose v. Chase Bank USA, N.A., 40 in which the Ninth Circuit held that the NBA preempted claims that Chase s failure to make required disclosures regarding the convenience checks that it provided to its credit card holders violated California law. The plaintiffs in Rose alleged that Chase violated California Civil Code because the attachments accompanying Chase s convenience checks failed to disclose the finance charges and transaction fees that would result from using those checks. In addition, the plaintiffs claimed that Chase s failure to make the required disclosures constituted a fraudulent and unfair business practice in violation of California s UCL. 41 In the district court, Chase moved for judgment on the pleadings, arguing that the NBA and OCC regulations preempted the California laws on which plaintiffs based F. Supp. 2d 1106 (C.D. Cal. 2007). 37 See id. at 1108, Id. at Id. at 1114 (quoting 12 C.F.R (b)(2)(iii) (emphasis in original)). 40 No , - F.3d. -, 2008 WL (9th Cir. Jan. 23, 2008). 41 Id. at* COPYRIGHT 2008 BY THE BUREAU OF NATIONAL AFFAIRS, INC. BBR ISSN

5 5 their claims. The district court granted Chase s motion and the plaintiffs appealed. Quoting extensively from Watters, the Ninth Circuit affirmed the district court s ruling. The court observed that, through the NBA, Congress explicitly granted to national banks the power to loan money on personal security, which was the power that Chase had exercised in extending credit through its convenience checks. 42 The court also recognized that OCC regulations provide that [e]xcept where made applicable by Federal law, state laws that obstruct, impair, or condition a national bank s ability to fully exercise its Federally authorized non-real estate lending powers are not applicable to national banks, and that [a] national bank may make non-real estate loans without regard to state law limitations concerning, inter alia, [d]isclosure and advertising, including laws requiring specific statements, information, or other content to be included in credit application forms, credit solicitations, billing statements, credit contracts, or other creditrelated documents. 43 The court held that Congress intended to preempt the state laws on which the plaintiffs relied because it had not indicated that national banks power to loan money on security was subject to state-law restrictions. 44 Thus, the court held that the NBA and OCC regulations preempted the plaintiffs claims. Other Federally-Regulated Financial Institutions In addition to clarifying preemption issues relating to national banks, in 2007 and early 2008, federal courts also issued decisions relating to the preemptive effect of federal laws and regulations on state-law claims brought against other federally-regulated financial institutions. For example, in a June 2007 decision in Discover Bank v. Vaden, 45 the United States Court of Appeals for the Fourth Circuit held, among other things, that the Federal Deposit Insurance Act ( FDIA ) preempted state law usury claims against Discover Financial Services, Inc. ( DFS ), the servicing affiliate of Discover Bank, a state-chartered, federally-insured bank. Discover Bank arose out of a lawsuit that DFS filed in Maryland state court seeking to recover against a cardholder for failure to pay her balance and the cardholder s subsequent counterclaims alleging that DFS breached the parties contract and violated Maryland s usury laws. Discover Bank filed a lawsuit in federal court seeking to compel arbitration of the cardholder s counterclaims under the Federal Arbitration Act. The district court ultimately granted Discover Bank s request for arbitration, holding that the bank was the party in interest with respect to the cardholder s counterclaims and that the FDIA preempted the cardholder s state-law usury claims. On appeal, the Fourth Circuit affirmed the district court s ruling. Noting that the FDIA s preemption of state law usury claims was an issue of first impression in the Fourth Circuit, the court considered the Supreme Court s preemption analysis in Watters and decisions by other circuit courts addressing preemption under the NBA and the FDIA. The Fourth Circuit held that, like 42 Id. at*4(quoting12u.s.c. 24 (Seventh)). 43 Id. at*2(quoting12c.f.r (d)). 44 See id. at* F.3d 594 (4th Cir. 2007). the NBA, which preempts state-law usury claims against national banks, the FDIA preempts state-law usury claims against federally-insured state-chartered banks. 46 Finding no issue of material fact regarding the existence of the parties arbitration agreement, the Fourth Circuit affirmed the lower court s order compelling the cardholder to submit her remaining breach of contract claim to arbitration. 47 Recent federal court decisions also have addressed the preemptive effect of the Home Owners Loan Act ( HOLA ) and Office of Thrift Supervision ( OTS ) regulations with respect to state-law claims against savings and loan associations. For example, in the January 2008 decision in Silvas v. E*Trade Mortgage Corporation, 48 the United States Court of Appeals for the Ninth Circuit held that HOLA and OTS regulations preempted claims that mortgage applicants brought against E*Trade under California s UCL. In Silvas, the plaintiffs alleged that E*Trade had refused to refund a fee that the plaintiffs paid to lock in an interest rate for a mortgage, even though they rescinded that mortgage within the three-day cancellation window provided by the Truth in Lending Act ( TILA ). The plaintiffs claimed that E*Trade violated the UCL by representing in disclosures and advertisements that the lock-in fee was non-refundable and by failing to refund the fee as required by TILA. The plaintiffs, however, did not assert any claim based on TILA itself. 49 In affirming the district court s order granting E*Trade s motion to dismiss, the Ninth Circuit held that OTS regulations occupy the field of lending regulations for federal savings associations and explicitly preempt any state laws imposing requirements on such associations regarding loan-related fees, disclosures and advertising. 50 In addition, the court found that TILA provides its own remedies for the alleged wrongdoing. Thus, the plaintiffs UCL claims were preempted because they fell squarely within the field occupied by the OTS regulations. 51 Although arising outside of the context of national banks, the Discover Bank and Silvas decisions further illustrate the impact of federal preemption in reducing the exposure of banks and other financial institutions to state-law claims. The Limits of Preemption Although many recent preemption rulings have limited the actions that may be brought against federallychartered or supervised financial institutions under 46 See id. at Section 27(a) of the FDIA provides, in relevant part, that State bank[s] may, notwithstanding any State constitution or statute which is hereby preempted for purposes of this section, take, receive, reserve, and charge on any loan or discount made, or upon any note, bill of exchange, or other evidence of debt, interest...attherateallowed by the laws of the State... where the bank is located. 12 U.S.C. 1831d(a). 47 See Discover Bank, 489 F.3d at 608. On March 17, 2008, the U.S. Supreme Court granted the plaintiff s petition for a writ of certiorari and agreed to review the Fourth Circuit s decision. 48 No , - F.3d -, 2008 WL (9th Cir. Jan. 30, 2008). 49 See id. at*1. 50 See id. at* See id. at*4. BANKING REPORT ISSN BNA

6 6 52 See Watters, 127 S. Ct. at 1567; Clearing House, 510 F.3d at 120; Martinez, 2007 WL , at *5 n.6. In fact, the OCC itself has acknowledged that the NBA and OCC regulations do not preempt all state-law causes of action relating to banks, including actions under California s UCL. See Office of the Comptroller of the Currency, Advisory Letter at p. 3 n.2 (Mar. 22, 2002) F. Supp. 2d 758 (N.D. Ohio 2007). 54 See id. at See id. at See id. at No. C TEH, 2007 WL (N.D. Cal. Dec. 14, 2007). 58 See id. at*4. state law, courts also have recognized that claims based on state laws of general applicability are not preempted if they do not significantly impede banks from exercising their banking powers granted by the NBA and federal regulations. 52 For example, in Levitanksy v. FIA Card Services, N.A., 53 the United States District Court for the Northern District of Ohio held that the NBA did not completely preempt a credit card holder s state-law breach of contract claim against FIA. The plaintiff in Levitanksy filed a complaint in Ohio state court alleging that FIA had charged a transaction fee for balance transfers and cash advance checks that was higher than the fee established in the parties contract. FIA removed the case to federal court and the plaintiff moved to remand the litigation back to the state court. 54 In opposing that motion, FIA argued that Section 85 of the NBA, which establishes the interest rates that national banks may charge on loans, and Section 86 of the NBA, which establishes the standard for determining whether a bank has charged usurious interest, preempted the plaintiff s claims and established removal jurisdiction. 55 The federal court granted the plaintiff s motion to remand, holding that the NBA did not completely preempt the state-law claims. The court found that the plaintiff did not assert a usury claim; rather, the plaintiff merely alleged that FIA had charged fees that were higher than those established by the parties contract. The court explained that the NBA and OCC regulations do not preempt state laws of general applicability, such as state contract law, which only incidentally affect national banks lending powers. 56 The United States District Court for the Northern District of California reached a similar conclusion in its December 2007 decision in Jefferson v. Chase Home Finance. 57 In Jefferson, the plaintiff alleged, inter alia, that Chase Home Finance violated California consumer protection laws by misrepresenting its policy for crediting his additional mortgage payments against the principal of his loan. 58 The plaintiff alleged that Chase held his additional mortgage payments in suspense rather than immediately crediting them as principal payments, contrary to representations on Chase s payment coupons, the promissory note, and the property deed. In moving for summary judgment, Chase argued, among other things, that the NBA and OCC regulations preempted the plaintiff s consumer protection claims. The court denied Chase s motion, holding that federal law and regulations did not preempt the plaintiff s claims. The court noted that OCC regulations provide that national banks and their operating subsidiaries may make real estate loans without regard to any limitations otherwise imposed by state laws regarding disclosure, advertising, terms of credit, repayments, rates of interest, and processing and servicing of mortgages. 59 The court, however, held that the OCC regulations did not expressly preempt or conflict with the consumer protection laws on which the plaintiff relied. The court found that the plaintiff did not challenge Chase s disclosures, loan servicing activities, or its policy for handling repayments, all of which would be preempted by OCC regulations. Rather, the plaintiff alleged that Chase violated California law by misrepresenting and failing to adhere to its stated policy for crediting additional payments. The court held that the state laws on which the plaintiff relied were not preempted because they only incidentally affected but did not impair Chase s ability to exercise its real estate lending powers. 60 Thus, as in Levitanksy, the court in Jefferson confirmed that plaintiffs may bring state-law claims against national banks so long as those laws are not expressly preempted and do not conflict with banks federallygranted banking powers. Conclusion Given the looming specter of a possible recession and the growing subprime mortgage crisis, banks and other financial institutions should anticipate increased scrutiny from federal and state regulators, as well as from private plaintiffs, as parties attempt to assign responsibility for what is predicted to be billions of dollars of additional losses in the current mortgage crisis. Although courts have recognized that federal regulators have the power to address improprieties in banking practices, through the preemption doctrine, courts have narrowed the roles of state regulators and private plaintiffs with respect to these issues. These decisions are particularly significant because they limit the claims that private litigants may bring against banks under state consumer protection laws, such as California s UCL, which courts historically have applied very broadly. Thus, federal preemption arguments are an increasingly powerful weapon that national banks and other financial institutions may use to defend against state enforcement actions and civil claims. 59 See id. at *10 (citing 12 C.F.R , 34.4(a)). 60 See id. at *10, COPYRIGHT 2008 BY THE BUREAU OF NATIONAL AFFAIRS, INC. BBR ISSN