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					                                                                                        Committee Agenda Date : November 5, 2009
                                                                                                             Agenda Item No. 14

County of Santa Clara
County Counsel

PSJ CC01 110509                                                                .
                                                                 Prepared by:. Jon Calegari
                                                                               Deputy County Counsel
                                                               Reviewed by:. Lori E. Pegg
                                                                             Assistant County Counsel

DATE:           November 5, 2009

TO:             Supervisor.George.Shirakawa, Chairperson
                Supervisor.Donald F..Gage, Vice Chair
                Public Safety & Justice Committee


                Miguel Marquez
                Acting County Counsel

SUBJECT:        Report on Local Regulation of Advertising Associated with "Negative Amortization" Type Loans

Accept report from Office of the County Counsel regarding whether the County may regulate the advertisement of
minimum payments and/or interest rates associated with negative amortization loans. (Referral from Public Safety &
Justice Committee on May 7, 2009.)

The Advisory Commission on Consumer Affairs (ACCA) has recently been considering advertising practices by
mortgage lenders, banks and mortgage brokers. ACCA is concerned with the practice of advertising a minimum
payment on mortgage loans that does not reflect the true Annual Percentage Rate (APR) of the loan or full interest
charge payments. On negative amortization loans, the initial payments are insufficient to pay for the interest owed on
the loan and the unpaid interest is added to the principal loan amount. Eventually, borrowers have to repay the balance
of the loan at a much higher monthly rate. Lenders sometimes advertise the initial low monthly loan payment for the

                                                                                           Committee Agenda Date : November 5, 2009
                                                                                                                Agenda Item No. 14

first portion of the repayment period, but fail to advertise the second much higher monthly loan payment after unpaid
interest has been added to the principal loan amount. ACCA made recommendations to curb and eventually eliminate
misleading, fraudulent, and predatory lending practices by mortgage lenders, banks and third party originators (brokers)
who take advantage of some consumers' lack of knowledge in order to gain business.

ACCA recommended to the Public Safety and Justice Committee that: (A) the Board of Supervisors impose a ban on
advertising minimum payment amounts and/or minimum payment calculations for all loan mortgage advertisements in
the County; and (B) the Board of Supervisors work with the State of California to develop a state-wide ban. Further
information regarding ACCA's recommendation can be found in the transmittal for agenda item #7 of the Public Safety
and Justice Committee's May 7, 2009 agenda.

Concerns about protecting borrowers from predatory lenders in the credit market have generated numerous laws and
regulations at the state and federal level. Our research revealed that an expansive amount of legislation regulating
mortgage advertisers already exists and that this legislation preempts most, if not all, local regulation in this field.
Fortunately, existing law already prohibits many of ACCA's concerns about the disclosure of the true APR and
installment payments for advertisements of negative amortization loans.

    A. A County ban on mortgage advertising would be preempted by existing federal law and
       would likely be preempted by state law.

Negative amortization loans are offered by various federal and state lenders and may be
advertised by state-licensed mortgage brokers. Federal lenders are licensed and governed by
federal law, while state lenders and mortgage brokers are licensed and governed by state law.
State and federal laws regarding these entities differ with respect to their preemptive effect, but
taken together, they appear to preempt the County's ability to enact regulations in this field.

     1. Federal laws governing federally chartered banks and savings associations expressly
        preempt local regulation of those entities.
Federal law expressly preempts state and local regulation of advertisements by federally chartered banks and savings
associations, including advertisements relating to mortgages. As interpreted by the federal courts, federal law expressly
preempts state and local regulation of advertising by federal savings associations under the Home Owners Loan Act
(HOLA) and by federal banks under the National Bank Act (NBA).

When enacting HOLA, Congress gave the Office of Thrift Supervision (OTS) broad authority to issue regulations
governing savings associations. OTS promulgated a preemption regulation that expressly "occupies the entire field of
lending regulation for federal savings associations" and specifies that "state laws purporting to impose requirements
regarding… disclosure and advertising" are preempted. (12 C.F.R. § 560.2 (b)(9).) The preemptive effect of these
regulations has been recognized by the courts. (Silvas v. E*Trade Mortgage Corporation (9th Cir. 2008) 514 F.3d 1001,
1005.) Therefore, the law is clear that HOLA and the regulations adopted thereunder preempt state and local regulation
of federal savings associations.

A similar provision in the NBA preempts state and local laws that purport to regulate mortgage advertisements made by
federal banks. The preemption provision specifically provides that a "national bank may make real estate loans…
without regard to state law limitations concerning…[d]isclosure and advertising." (12 C.F.R. § 34.4 (a)(9).) The courts
have acknowledged that the NBA preempts state regulation. (In re Countrywide Financial Corp. Mortg. Marketing and
Sales Practices Litigation (S.D.Cal. 2009) 601 F.Supp.2d 1201, 1223.)

                                                                                             Committee Agenda Date : November 5, 2009
                                                                                                                  Agenda Item No. 14

     2. State law has fully occupied the field of regulation of predatory practices in home
        mortgage lending, which preempts local regulation of home mortgage lending and, by
        extension, mortgage advertising.
The California Supreme Court has considered whether a local jurisdiction may regulate predatory lending tactics in light
of Financial Code section 4970 et. seq., which regulates predatory lending tactics in home mortgages. (American
Financial Services Association v. City of Oakland (2005) 34 Cal.4th 1239, 1252-1256.) The Court held that the
Legislature had demonstrated an "implicit intent to fully occupy the field of regulation of predatory lending tactics in
home mortgages" and, therefore, that local regulation was preempted and thus void. The court provided many reasons
for its holding. First, the regulation of mortgage lenders has historically occurred at the state, not the municipal, level.
Second, the court considered the entire regulatory scheme regulating mortgage lending by banks, savings associations,
real estate brokers, finance lenders, and residential mortgage lenders licensed in California. Third, the court noted that
the "effective regulation of mortgage lending requires uniform treatment throughout the state."

For similar reasons, a court would likely find that local regulation of mortgage advertising is preempted by state laws.
Regulation of advertisements by mortgage lenders and brokers has traditionally occurred at the state level. The state
already regulates advertisements by these entities in a comprehensive regulatory scheme. Local regulation of mortgage
advertisements is contrary to the need for statewide uniformity in these regulations. Therefore, if challenged, a court
would likely find that any local regulation pertaining to mortgage advertisements is preempted by state law.

    B. Numerous federal and state laws address deceptive mortgage advertising.
Mortgage advertising is regulated by both state and federal laws. Examples of laws applicable to the advertisement of
negative amortization loans are listed below.

     1. Federal laws regulating mortgage advertising.
The Federal Truth in Lending Act (TILA), 15 U.S.C. §1601 et seq., is applied to both federally-chartered as well as
state-chartered creditors. TILA applies to all credit transactions in which a security interest is acquired in real property,
so it would apply to mortgages and other types of home loans.

TILA regulations specific to advertisements require that if an advertisement states a finance rate, it shall state the annual
percentage rate (APR), and if the initial APR can be increased by the lender in the future, the advertisement must state
that fact. Additionally, the TILA advertising regulations require that, if the amount of any payment is advertised, then
the advertisement shall also state the terms of repayment and the APR. This regulation squarely addresses ACCA's
concerns about misleading mortgage advertisements.

     2. State laws regulating mortgage advertising.
States may also regulate mortgage advertising by state-chartered entities more extensively than federal law, so long as
those laws do not conflict with TILA. There are two state laws that regulate mortgage advertising.

     i. Real Estate Law (Business and Professions Code section 10000 et seq.).
The Real Estate Law generally licenses and regulates California real estate brokers. Licensed real estate brokers are
prohibited from producing misleading or deceptive advertising for real property loans. The implementing regulations of
the law provide specific examples of advertisements considered to be false, misleading or deceptive in connection with

                                                                                        Committee Agenda Date : November 5, 2009
                                                                                                             Agenda Item No. 14

negative amortization loans. An advertisement is misleading if, among other things, it represents an installment in
repayment of an adjustable rate, interest only or payment-option loan without an equally prominent disclosure of the
APR. This regulation addresses concerns about mortgage brokers who do not adequately disclose information when
advertising negative amortization loans.

    ii. California Residential Mortgage Lending Act (Financial Code section 50000 et seq.).
The California Residential Mortgage Lending Act (CRMLA) creates a licensing system for residential mortgage lenders
and loan servicers. Mortgage lenders and loan servicers are prevented from knowingly misrepresenting information in
their transactions. Regulations that implement CRMLA have disclosure requirements identical to those described above
for mortgage brokers who advertise negative amortization loans.


Numerous state and federal laws already address deceptive advertising of negative amortization loans. County efforts to
regulate in this field would likely be preempted by federal and/or state law.


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