Federal Preemption of State Prepayment-Penalty Statutes: The OTS Reverses Itself
Probate and Property, May/June 2004, Volume 18, Number 3
By John C. Murray
John C. Murray practices law with First American Title Insurance Company in Chicago, Illinois.
Under federal preemption principles and regulations promulgated by the Office of Thrift Supervision (OTS), federal savings associations can include prepayment penalty clauses in commercial loan documents and enforce such clauses according to their terms, regardless of any state law to the contrary. See 12 C.F.R. § 545.2 (2003) (federal regulations are “preemptive of any state law purporting to address the subject of operations of a Federal savings association”); 12 C.F.R. § 560.34 (“Subject to the terms of the loan contract, a Federal savings association may impose a fee for any prepayment of a loan”). For many years, this same preemption protection has been accorded to state-chartered lenders under the OTS’s interpretation of the Alternative Mortgage Transaction Parity Act (“Parity Act”), 12 U.S.C. §§ 3801–06. But the OTS recently reversed itself and removed this immunity, with respect to prepayment premiums and late charges, for state-licensed lenders who make home mortgage loans. The list of institutions subject to the new rule includes state savings and loan associations, mutual savings banks, state savings banks, mortgage bankers, certain HUD lenders, and others who make mortgage loans.