Hola Preemption and the Original Intent of Congress: Are Federal Thrifts Necessary to Stabilize the Housing Market?

Article excerpt

ABSTRACT

This article studies legislation, regulations, and case law to analyze whether the Homeowners Loan Act, as well as other measures taken to stabilize federal thrifts in the last forty years, have served their original purpose. It also examines the impact of federal intervention on states and homeowners and the role that federally-chartered institutions such as banks and savings and loan associations played in the 2008 market collapse. Over the course of this analysis, particular attention is given to Title X of the Dodd-Frank Wall Street Reform and Consumer Protection Act. This act has numerous goals including implementing stronger consumer protections, restoring state rights, and preventing another financial crisis, thereby avoiding the need for government funded recovery. It is clear that federal regulators overstepped their bounds in order to preserve federal thrifts, infringed on the rights of states, and limited homeowner access to justice-all in the name of promoting market stability. The evidence proves that federal intervention worsened the impact of the crisis. This article concludes that federal thrifts no longer serve their original purpose and are no longer economically viable without preferential treatment from the federal government. Since states are in the best position to protect homeowners and institutions do not need an incentive to engage in residential lending, it is in the best interest of all parties to eliminate the federal thrift charter.

Introduction

In response to the worst economic crisis since the Great Depression,1 Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 ("Dodd-Frank," "Dodd-Frank Act").2 Federal institutions played a significant role in causing this crisis, specifically the housing market collapse, by using preemption to block state efforts at addressing the financial meltdown.3 Dodd-Frank repealed the regulations mandating field preemption and eliminated the Office of Thrift Supervision ("OTS"), instead bringing the regulation of thrifts under the control of the Office of the Comptroller of the Currency ("OCC").4 The Act also created the Bureau of Consumer Financial Protection ("CFPB" or "Bureau").5

In the 1930s, Congress enacted the Home Owners' Loan Act ("HOLA")6 and created the federal thrift charter.7 Congress considered federal intervention necessary to the country's recovery, and intended for these actions to stimulate the economy and provide a resource for home financing.8 Recently, HOLA has been the basis for removing cases brought by homeowners from state to federal court due to field preemption.9 After removal many homeowners' claims are dismissed due to the lack of a comparable federal remedy, caused in part by the failure of the OTS to adopt consumer protection laws.10 Congress' original intent was to create more sources for loans, not to usurp state power and restrict homeowner access to the courts." Dodd-Frank makes some effort to undo the impact of the OTS power grab by subjecting OCC regulations to conflict preemption. Unfortunately, to date, courts have not applied conflict preemption and have instead relied on the fact that the Act does not apply retroactively to completely disregard the reforms.12

In theory, the authority vested in the CFPB should create a system of dual regulation, thereby returning power to the states while creating a parallel system of federal measures.13 However, it remains to be seen whether the CFPB can operate to prevent the harm to homeowners caused by federal thrifts.14 The CFPB's creation was subject to extensive debate and its current operation is controversial.15 If DoddFrank's changes are not implemented and the CFPB is abolished or its activities limited in the name of partisan politics, homeowners and state economies will suffer while banks benefit from the same relaxed and confusing regulatory environment that contributed to the crisis.

This article addresses a number of issues including: the need for federal savings and loans in the context of the original purpose of federal thrifts; the nature of our system of government; the regulatory failures of the last decade; and Dodd-Frank's controversial attempts to provide a federal solution. …