September 4, 1997
Philip L. Carson, Esq.
Miller Carson Boxberger & Murphy LLP
One Summit Square
Suite 1400
Fort Wayne, IN 44802-3173
NCUA's Region IV Office requested that the Office of General Counsel
review the legal opinion you provided in the above-referenced
letter. Professional Federal Credit Union (FCU) requested an
opinion on whether the FCU is subject to the provision of the
Indiana Uniform Consumer Credit Code (UCCC) that permits consumers
to refinance balloon payment loans on the same terms and conditions
as the original loan at maturity. IND. CODE ANN. �-4.5-2-405
(Burns 1996).
You contend that federal law and regulation do not preempt the
Indiana state law provision referenced above. You state at page
two of your letter:
[I]n order for preemption to prevail, there must be a clear conflict
between the federal law and the state law, or a clear declaration
in the federal law that all state laws on the subject are preempted,
or the issue involved must relate to a subject in which there
is a dominant federal interest in controlling the subject.
While we do not disagree with your general statement of the criteria
considered in a federal preemption analysis, we disagree with
your conclusion that FCUs in Indiana are subject to the above-referenced
Indiana UCCC provision. You state these criteria in the disjunctive
and, thus, according to your view, if any one of these criterion
are present, federal law will be deemed to preempt state law.
It is NCUA's position that all these criteria are present in
the issue at hand.
Some additional background regarding federal preemption is useful
to our discussion of this issue. Federal preemption of state
laws stems from the supremacy clause, U.S. CONST., art. V, cl.
2, which provides that the laws of the United States shall be
the supreme law of the land, notwithstanding any state laws to
the contrary. Preemption may be express, as when specified in
a statute, Fidelity Federal Savings and Loan Ass'n v. de la
Cuesta, 458 U.S. 141, 152-153 (1982), or it may be implied
by the nature of federal legislation and the subject matter, even
absent a declaration of preemptive intent. Meyers v. Beverly
Hills Federal Savings and Loan Ass'n, 499 F.2d 1145, 1146
(9th Cir. 1974). Where Congress' preemptive intent is not expressly
stated, it may be inferred on either of two bases. First, a state
statute may conflict with federal law. Fidelity Federal,
458 U.S. at 152-153. Second, "the scheme of federal
regulation may be so pervasive as to make reasonable the inference
that Congress left no room" for state action in the same
area. Id.; Conference of Federal Savings and Loan Assn's
v. Stein, 604 F.2d 1256, 1260 (9th Cir. 1979), aff'd mem.,
445 U.S. 921. Where Congress chooses to act, it may take over
the entire field or only a portion thereof. National State
Bank, Elizabeth, N.J. v. Long, 630 F.2d 981, 985 (3d Cir.
1980). While federal preemption of state law may be implied,
it is not to be assumed, and federal legislation will only preempt
a field traditionally within a state's police power if that is
the clear intent of Congress. National State Bank, 630
F.2d at 985.
The Federal Credit Union Act (the Act) preempts state law regarding
rates, terms of repayment and other conditions of FCU loans and
lines of credit. In pertinent part, the Act states:
A Federal credit union . . . shall have power --
. . . .
(5) to make loans, the maturities of which shall not exceed twelve
years except as otherwise provided herein, and extend lines of
credit to its members, to other credit unions, and to credit union
organizations and to participate with other credit unions, credit
union organizations, or financial organizations in making loans
to credit union members in accordance with the following:
(A) Loans to members shall be made in conformity with criteria
established by the board of directors . . . .
12 U.S.C. �57(5). Federal law controls any terms and conditions
related to loan maturities and any terms and conditions not in
conformance with criteria established by each FCU's board of directors.
Other provisions of the Act provide additional support for preemption.
With regard to the duties of an FCU's board of directors, the
Act provides:
Among other things, the board of directors shall --
. . . .
(8) subject to any limitations of this subchapter, determine
the interest rates on loans, the security, and the maximum amount
which may be loaned and provided in lines of credit;
. . . .
(20) establish lending policies . . . .
12 U.S.C. �61b(8), (20). What distinguishes a balloon
note from other types of loans is the term or maturity of the
loan, and, as noted above, the Act expressly preempts state law
in that respect.
A clear conflict exists between NCUA's lending regulation, which
is federal law, and the Indiana UCCC provision regarding balloon
loan refinancing. Indiana law gives consumers the right to refinance
a balloon note without penalty on the original terms of the note.
IND. CODE ANN. �-4.5-2-405. Federal law allows an FCU
board of directors to determine balloon loan refinancing terms
and conditions.
Under its broad authority to prescribe implementing regulations,
the NCUA Board issued the lending regulation at issue. 12 U.S.C.
�66(a); 12 C.F.R. �1.21. The preemption sections
of the lending regulation were properly issued with the notice
and comment required by the Administrative Procedures Act (APA)
in 1984. 49 Fed. Reg. 30683 (August 1, 1984). In the regulation,
the Board states its authority to regulate the rates, terms of
repayment and other conditions of FCU loans and lines of credit,
and its intention to preempt any state law purporting to limit
or affect these issues. 12 C.F.R. �1.21(b)(1). Included
in the list of terms controlled by federal law are "rates
of interest and amounts of finance charges" and "the
terms of repayment, including . . . balloon payments." 12
C.F.R. �1.21(b)(1)(i)(A), (ii)(C). The NCUA's regulation,
which is a properly promulgated regulation under the APA and the
Act, conflicts with and, therefore, preempts state law.
There is ample support for the conclusion that a dominant federal
interest exists to control and regulate FCU lending. FCUs are
instrumentalities of the federal government, chartered under the
authority of federal statute. 12 U.S.C. �54. Upon approval,
an FCU exists as a corporation, "vested with all the powers
and charged with all the liabilities conferred and imposed by
. . . [Title I of the FCU Act] upon corporations organized hereunder."
Similarly, the Board has sole authority to suspend or revoke
an FCU's charter and to liquidate it. 12 U.S.C. Ё1766(b),
1782(f), 1787. Generally, the Board has rulemaking authority
governing an FCU's creation, express and incidental powers, and
operations. 12 U.S.C. �66(a). Our view is that Congress,
in the Act, contemplated a pervasive federal system of chartering,
supervision, examination, and regulation of FCUs.
In support of your position, you place substantial emphasis on
the lack of any reported case law upholding NCUA's preemption
regarding loan terms and conditions, with the exception of certain
state court cases of which you are aware upholding NCUA's preemption
of state laws governing interest rates. Your reliance upon the
absence of case law is misplaced. In our view, the absence
of case law on this particular matter offers no weight to your
contentions. For that matter, the absence of case law, if of
any legal significance, indicates only that there has been no
successful challenge to NCUA's position regarding preemption in
this area. Regarding relevant case law, we suggest you review
a recent Supreme Court decision addressing the deference to which
agency interpretation is entitled. In Smiley v. Citibank,
517 U.S. ___, 135 L.Ed.2d 25 (1996), the Supreme Court upheld
a regulation adopted by the Comptroller of the Currency (OCC)
that permitted national banks to charge interest at the rate permitted
by the state where a bank is located, the effect of which was
to preempt the state law where the plaintiff resided. The Supreme
Court held that the OCC regulation is entitled to substantial
deference and is a reasonable interpretation of the National Bank
Act.
It is our understanding that the legal position you have taken
on this issue would severely limit the asset liability management
policies for an FCU. We request that you reconsider your legal
opinion in light of the discussion contained in this letter and
suggest that you issue a revised opinion consistent with NCUA's
rule and interpretations of the Act
Sincerely,
Sheila A. Albin
Associate General Counsel
GC/MSC:sg
SSIC 3000
97-0537
cc: Region IV
Greg Troutner, Professional FCU