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SUPREME “i

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SUPREME COURT OF THE UNITED STATES

LINDA WATTERS, COMMISSIONER, MICHIGAN

OPPich OF INSURANCE ANTY FINANCIAL SERVICES,

Petitioner,

WACHOVIA BANK, N.A,, ef al,

Respondents.

On Writ of Certiorart to the

United States Court of Appeals

for the Sixth Cireurt

AMUICECURIAE BRIEF OF ECONOMISTS

AND SCHOLARS MARCUS COLE, CHRISTOPHER

DEMUTH, RICHARD EPSTEIN, ROBERT LITAN,

MICHAEL SEATEN, PETER WALLISON AND TODD

ZYWICKEIN SUPPORT OF RESPONDENTS

SAVER AZMIAN

PEANS BADER’

COMPETESIVE ENTERPRISE INSTELC EI

LOOl Connecticut Ave. NW. Suite 1250

Washington, D.C. 20036

(202) 334-2278

*Counsel of Record

TABLE OF CONTENTS

Page

INTEREST OF THE AMICI CURIAE ECONOMISTS

ED sesctictteniantertinetatinntsrguinemimmneniinneias ]

RTS Gl FRINGE cccteicrcscvecescsnsensscnsennecteniemeneson 3

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I. THIS COURT SHOULD REJECT

PETITIONER’S ATTEMPT TO CLAIM THE

MANTLE OF CONSUMER PROTECTION ............ 4

Il. THERE IS GROWING JUDICIAL

RECOGNITION OF THE FACT THAT CREDIT

REGULATIONS AIMED AT PROTECTING

CONSUMERS MAY ACTUALLY HURT

{Il. ECONOMIC STUDIES INCREASINGLY

DEMONSTRATE THE HARMFUL EFFECTS

OF CONSUMER CREDIT REGULATION ........... 11

a i 21

ii

TABLE OF AUTHORITIES

Page

Cases

Dunware v. Ware Savings Bank, 423 N.E.2d 998 (Mass.

ee ee i iciiteciancsiseninntiacciscnictniaipaicainacitenaidiaatabtienied 6, 10, 12

Franklin National Bank v. New York, 347 U.S. 373 (1954) ..5

Income Realty & Mortgage Inc. v. Columbia Savings & Loan

Pt EY 5 > SR, ROO 8

Lake v. Equitable Sav. & Loan Ass'n, 674 P.2d 419 (Idaho

ee iceictsncsonsnpndsscoieneenannssntespiuiiaentehintonsenennsedesiniennneminsensnineenh 9

Malouff v. Midland Federal Savings & Loan Ass'n, 509 P.2d

I: Sere tctnensinnnnsotinsnenvesninsiiniiandéiciesmmndovanidetenn 9

Marquette National Bank v. First Omaha Serv. Corp., 439

Se Se Pa citcccastniensinnunicnsenseinmenntedescenmmatpenteniedsonien 7, 15

Martin v. Peoples Mutual Savings & Loan Ass'n, 319

ee EE I ecctciscinsctnsmsncenncneniinniaesninscinniantenesitit 9

Occidental Savings & Loan Ass'n v. Venco Partnership, 293

Pe EE CP ccccrtcnrcrnsienessentnnetmsenenniepevennts 9

United Savings Bank Mut. v. Barnette, 695 P.2d 73 (Or. App.

FIP ve rrtcinsereesindesipiensiedsenisenieclgnnmaphaupniniiacaunininininnniiiitt 8

Weiman v. McHaffie, 470 So.2d 682 (Fla. 1985)... 9

Wellenkamp v. Bank of America, 21 Cal.3d 943 (1978)........ 8

Williams v. First Federal Savings & Loan Ass'n of Arlington,

Pe Fae POs PU Piccctecnsesccceniccsemnsesesinnanantenivomian 8

Other Authorities

Coyle, The Weightless World: Strategies for Managing the

Ff _____, EITC mare te eon TE a 6

DeMuth, The Case Against Credit Card Interest Rate

Regulation, 3 Yale Journal of Regulation 201 (1986)......14

Durkin, An Economic Perspective on Interest Rate

Regulation, 9 Ga. St. U. L. Rev. 821 (1993)... 13

iii

Ellichausen & Staten, Regulation of Subprime Mortgage

Products: An Analysis of North Carolina's Predatory

Lending Law, 29 J. Real Est. Fin. & Econ. 411 (2004)

svieaoadethpiiiiitebaitipvaaaenieiicaeiioasingaaicaiiaasiisiigaiiianiei 17,18, 19, 20

Harvey & Nigro, Do Predatory Lending Laws Influence

Mortgage Lending?, An Analysis of the North Carolina

Predatory Lending Law, 29 J. Real Est. Fin. & Econ. 435

SET vnrensehbcetiscinsdigniclinsnssabesesisiinesiidibeniininnennanniecsiininemneiiniinds 19

Lampe, Wrong from the Start? North Carolina's "Predatory

Lending" Law and the Practice vs. Product Debate, 7

I Bis SC i siicnesiersineencnpnentencnsnennenessnemnateencies 17

Litan, Unintended Consequences: The Risks of Premature

State Regulation of Predatory Lending (ABA, 2002) 17, 20

Meador, The Effects of Morgagee Laws on Home Mortgage

Rates, 34 J. Econ. & Bus. 143 (1981) .......cceeceeeeseeeeeeeeee 11

Milton Friedman, Defense of Usury, Newsweek, Apr. 6,

FEE eee eee renee ebeneneiosenenanestinn 13

Moore, Micro-Credit Pioneer Wins Peace Prize, Wash. Post,

ns RR incisal taller nineteen 5

Murdock, The Due-on-Sale Controversy. Beneficial Effects

of the Garn-St. Germain Depository Institution Act of

1982, 1984 Duke L. J. 121 (1984)... ccssssessesseeernnes 12

OCC Working Paper, Economic Issues in Predatory Lending

a ee icrihciiaseneinniniiapeennnmnineincnion 17, 18, 19, 20

Peterson & Frew, Creditor Remedy Restrictions and

. Interstate Differences in Personal Loan Rates and

Availability: A Supplementary Analysis (CRC, 1977).....15

Peterson, The Costs of Consumer Credit Regulation (CRC

Ne NE, ee iinnsnelenctnisensininnicsinnsconincisendddtniinemensitnanianiies 1]

Peterson, The Impact of Creditors' Remedies on Consumer

ee __, , SE NET 16

Pratt & Campbell, An Economic Analysis of the "Due on

Sale" Clause in California Mortgage Markets (CRC,

Zywicki, The Economics of Credit Cards, 3 Chapman L.

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INTEREST OF THE AMICI CURIAE ECONOMISTS

AND SCHOLARS

G. Marcus Cole is Professor of Law, the Helen L.

Crocker Faculty Scholar, and Associate Dean at Stanford

Law School.' He has published articles on numerous

financial and commercial law subjects, ranging from

consumer and corporate bankruptcies to the law and

economics of venture capital investment. He has also been a

national fellow at the Hoover Institution and served as editor-

in-chief of the Northwestern Journal of International Law and

Business.

Christopher DeMuth studies government regulation at

the American Enterprise Institute, where he has served as

president since 1986. He has also served as Director of the

Harvard Faculty Project on Regulation from 1977-1981,

Executive Director of the Presidential Task Force on

Regulatory Relief from 1981-1983, and as Administrator of

the Office of Management and Budget’s Office of

Information and Regulatory Affairs from 1981-1984.

Richard Epstein is the James Parker Hall

Distinguished Service Professor of Law at the University of

Chicago, and the Peter and Kirsten Bedford Senior Fellow at

the Hoover Institution. He was the editor of the Journal of

Law and Economics from 1991-2001, and is a director of the

John M. Olin Program in Law and Economics. He is a

leading constitutional law scholar and the author of numerous

' The parties have consented to this brief through a blanket consent

letter filed by petitioner and a letter of consent by respondents to this

brief, which has been filed with the Clerk of the Court. No counsel

for a party authored this brief in whole or in part. No person or entity

other than amici’s counsel, Competitive Enterprise Institute, made a

monetary contribution to the preparation or subinission of this brief.

2

books and articles on topics ranging from antitrust law to

health care and property rights.

Robert E. Litan is Vice President for Research and

Policy at the Kauffman Foundation and Senior Fellow in the

Economic Studies Program of the Brookings Institution. He

has spent much of his professional career researching

financial institutions and markets, and has authored or co-

authored numerous books and over 100 articles on the

subject. He also has been a consultant to the U.S. Treasury

Department, the House of Representatives Banking

Committee, and the Federal Home Loan Board on financial

issues.

Michael E. Staten is Research Professor and Director

of the Financial Services Research Program at the George

Washington University School of Business. Prior to moving

there in August 2006, he was director of the Credit Research

Center at both Georgetown University and Purdue University

from 1990-2006. Over the past 16 years he has conducted

research projects on a wide range of consumer credit issues,

and has frequently testified on credit and insurance matters

before congressional and state legislative committees. He

has published numerous articles on retail financial services in

various professional journals and edited volumes.

Peter J. Wallison is a Resident Fellow of the

American Enterprise Institute, where he serves as co-director

of its program on Financial Market Deregulation and is a

member of the Shadow Financial Regulatory Committee.

From 1981 to 1985, he was General Counsel of the Treasury

Department, where he was involved in developing the

Reagan Administration's proposals for financial services

deregulation and served as General Counsel to the

Depository Institutions Deregulation Committee. During

1986 and 1987, Mr. Wallison was White House counsel to

3

President Reagan. Mr. Wallison is the author of numerous

books and articles on financial services regulation.

Todd Zywicki is Professor of Law at George Mason

University, where he teaches in areas such as Bankruptcy,

Contracts, Commercial Law, and Law and Economics. From

2003-2004, he served as the Director of the Office of Policy

Planning at the Federal Trade Commission. He is a Senior

Fellow at the university’s James Buchanan Center, and a

Fellow of the Internation.) Centre for Economic Research in

Turin, Italy. He is the author of more than 50 articles in

leading law reviews and peer-reviewed economics journals.

He has testified before Congress on consumer credit issues

and was recently named to the Department of Justice Study

Group on “Identifying Fraud, Abuse and Errors in the United

States Bankruptcy System.”

The positions taken in this brief by these individuals

are their own and not those of the organizations with which

they are affiliated.

SUMMARY OF ARGUMENT

The wisdom of state consumer credit regulations is

not a factor in resolving federal banking preemption disputes.

Nonetheless, the State of Michigan and its supporting amici

have injected that issue into this case. But as both case law

and economic research demonstrate, such measures can often

backfire, hurting the very consumers that they are intended to

protect by making credit more expensive and less available.

The Office of the Comptroller of the Currency (OCC)

has the dual function of oversecing both national banks and

the treatment that customers receive from those banks.

Given the inherent relationship between these two functions,

the OCC’s oversight is far more likely to produce a

4

regulatory optimum than the approach advocated by the

petitioner.

ARGUMENT

THIS COURT SHOULD REJECT PETITIONER’S

ATTEMPT TO CLAIM THE MANTLE OF

CONSUMER PROTECTION

The question on which certiorari was granted in this

case is the narrow issue of whether the OCC properly

determined the preemptive effect of one of its regulations on

Michigan’s mortgage lending laws. But Michigan and its

supporting amici have cast this as a much broader issue of

consumer protection. Whatever the merits of their approach,

their substantive claims deserve a response.

Michigan states that a major purpose of its mortgage

lending statutes and regulations is “to protect consumers

from unfair, unsound, and abusive lending practices.” Pet.

Brief at 5. See also id. at 11 (“States have a substantial

interest in protecting their citizens from abusive mortgage

lending practices ...”). Similarly, the Center for State

Enforcement of Antitrust and Consumer Protection Laws

argues in its amicus that “preemption of state banking laws

by the Office of the Comptroller of the Currency will result

in inadequate protection of consumers against predatory

lending practices and other abuses ....” Center Amicus Brief

at |.

Consumer protection receives even more attention in

the joint amicus brief filed by AARP, eleven other consumer

groups, and seventeen law professors. According to AARP,

consumer protection is the issue before this Court: “At issue

“5

in this case is whether the states will be able to protect their

citizens from abuses by national bank operating subsidiaries

established under the states’ own charters.” AARP Brief at

3. AARP contends that states and localities “are much more

likely than the federal government to appreciate the impact of

abusive lending practices” (id. at 8) and that “empirical

studies have demonstrated” that state mortgage lending laws

“are effective in reducing predatory lending without reducing

consumers’ access to legitimate credit.” Jd. at 10 (footnote

omitted). According to AARP, “the OCC sides with banks

rather than consumers.” /d. at 13. Preempting state

consumer protection laws, AARP claims, “is unfair and

unwise.” Jd. at 10.

In one sense, AARP’s appeals to wisdom and fairness

run counter to this Court’s characterization of these factors as

irrelevant to resolving state-Federal conflicts: “We cannot

resolve conflicts of authority by our judgment as to the

wisdom or need of either conflicting policy.” Franklin

National Bank v. New York, 347 U.S. 373, 378 (1954);

accord Ass'n of Banks in Ins. v. Duryea, 270 F.3d 397, 408

(6 Cir. 2001) (“The fact that the state legislature enacted

[the state law to protect] consumers does not, for that reason

alone, preclude federal preemption”). Nonetheless, this

Court should not be left with the impression that consumer

protection concerns, relevant or not, are predominantly on the

side of the petitioner.

The importance of credit in enabling people to better

their lives cannot be overestimated. In the words of -

economist Muhammad Yunus, the 2006 winner of Nobel

Peace Prize, “credit is the key that unlocks their humanity.””

? Professor Yunus was honored for his pioneering efforts to establish

microcredit systems for the poor in developing countries. Molly Moore,

Micro-Credit Pioneer Wins Peace Prize, Washington Post, Oct. 14, 2006,

at Al. His full quote on this point is as follows: “Poverty covers people

6

Yet, as both this and lower courts have recognized, in the

context of mortgages and, more generally, of credit,

measures aimed at protecting the public may very often do

exactly the opposite. They restrict credit and raise its cost,

harming the very consumers supposedly protected by them.

Moreover, despite AARP’s claim of support from empirical

studies, there is a growing body of economic literature that

demonstrates the anti-consumer nature of such consumer

protection measures. This is yet another reason for

concluding that the OCC’s preemption of state regulation in

this case properly furthers the National Bank Act’s purposes

of enabling national banks to provide the public with

adequate access to credit. See, e.g., 12 U.S.C. § 24; Franklin

National Bank, 347 U.S. at 375.

II.

THERE IS GROWING JUDICIAL RECOGNITION OF

THE FACT THAT CREDIT REGULATIONS AIMED

AT PROTECTING CONSUMERS MAY ACTUALLY

HURT THEM

Courts 1ave frequently recognized that protecting a

consumer from loan provisions designed to protect the

interests of a creditor may actually hurt rather than help

consumers over the long run. In Fidelity Federal Savings &

Loan Ass'n v. De la Cuesta, 458 U.S. 141 (1982), this Court

upheld a Federal Home Loan Bank Board (FHLBB)

in a thick crust and makes the poor appear stupid and without initiative.

Yet if you give them credit they will slowly come back to life. Even

those who seemingly have no conceptual thought, no ability to think of

yesterday or tomorrow, are in fact quite intelligent at the art of survival.

Credit is the key that unlocks their humanity.” Quoted in Diane Coyle,

The Weightless World: Strategies for Managing the Digital Economy 79

(1997).

7

regulation preempting state laws restricting the enforcement

of “due-on-sale” clauses, which allow a lender to seek

immediate repayment of a mortgage loan upon the sale of the

property by the borrower.

In doing so, this Court noted that the FHLBB had

reasonably concluded, after economic analysis, that state

laws restricting enforcement of due-on-sale clauses ““will

reduce the amount of home-financing funds available to

potential home buyers, and generally cause a rise in home

loan interest rates’” at borrowers’ expense. Jd. at 168

(quoting the FHLBB’s Schott Advisory Opinion); accord id.

at 169 (citing risk that “flow of home loan funds ... will be

reduced” and savings and loans’ very solvency will be

endangered).’

While this Court did not make its own independent

judgment about whether permitting the enforcement of due-

on-sale clauses was good for consumers, deferring to the

FHLBB, it did observe that there was nothing “arbitrary or

capricious” about the FHLBB’s conclusion, which was

supported by both analysis and rulings from a number of

courts. Jd. at 169.

~...- Indeed, many other courts agreed with the FHLBB

that imposing restrictions on the enforcement of due-on-sale

clauses would harm the very consumers such restrictions

purport to help, mortgage borrowers.

* Similarly, analysts have found that this Court’s decision in Marquette

National Bank v. First Omaha Serv. Corp., 439 U.S. 299 (1978), which

held that the National Bank Act preempted state credit card interest rate

ceilings except for those imposed by a national bank’s home state, had

clearly positive results for consumers and resulted in the democratization

of credit markets in the United States. See infra at 15; Todd Zywicki,

The Economics of Credit Cards, 3 Chapman L. Rev. 79, 147 (2000).

8

Williams v. First Federal Savings & Loan Ass'n of

Arlington, 651 F.2d 910, 930 n. 47 (4th Cir. 1981), rejected

challenges to the enforceability of a mortgage's due-on-sale

clause without proof of impairment of security under

Virginia’s antitrust and common law. The court noted that

such challenges might immediately benefit ‘“‘a relative few”

homeowners, but that they would cause far more harm in the

future. In its words, they would “inexorably lead to an

increase in interest rates” and “all future purchasers of homes

in the end would suffer.” The court pointed out that the

purported ““beneficence’” of protecting borrowers from the

clause is “‘shortsighted,” since this would “necessarily

restrict, if not dry up, mortgage funds available to the next

generation of borrowers.”” /d., quoting Wellenkamp v. Bank

of America, 21 Cal.3d 943, 954, 148 Cal.Rptr. 379, 386 (Cal.

1978) (Clark, J., dissenting).

Similarly, the Massachusetts Supreme Judicial Court

observed that enforcing due-on-sale clauses was good for

consumers, since it “lowers the interest rate at which the

bank is willing to loan money” by reducing its risks when

interest rates fluctuate. Dunware v. Ware Savings Bank,

423 N.2.2d 998, 1001-02 (Mass. 1981). As a result,

“Elimination of the [due-on-sale] clause ‘will cause

widespread hardship to the general home-buying public.’”

Id. at 1004, quoting FHLBB Advisory Opinion No. 75-647, at

37 (July 30, 1975).

Many other state courts reached similar conclusions.

United Savings Bank Mut. v. Barnette, 695 P.2d 73, 76 (Or.

App. i981) (noting “the substantial benefits that due-on-sale

clauses have on interest rates and loan availability”); Income

Realty & Mortgage Inc. v. Columbia Savings & Loan Ass'n,

661 P.2d 257, 261-63 (Colo. 1983) (restricting enforcement

of due-on-sale clauses will “necessitate an increase in the

interest rate of new loans”; “The due-on-sale clause was of

benefit to both” lender and borrower, since “the borrowers

9

received a lower interest rate than they would have, if there

had been no such clause”); Martin v. Peoples Mutual

Savings & Loan Ass'n, 319 N.W.2d 220, 226-28 (lowa 1982)

(“economic and social consequences of nullifying the due-

on-sale provisions” include “charging new borrowers a

higher rate of interest than they would otherwise be required

to pay”; Occidental Savings & Loan Ass'n v. Venco

Partnership, 293 N.W.2d 843, 847, 849 (Neb. 1980) (if such

clauses are not enforced, “ultimately, no one will be able

secure satisfactory financing”; thus, “a ‘due on sale’ clause 1s

not repugnant to public policy but, to the contrary... . the

clauses may favor the public interest”); Lake v. Equitable

Sav. & Loan Ass'n, 674 P.2d 419, 422 (Idaho 1983) (“less

money available to potential borrowers” if borrowers

shielded from enforcement of such clauses); Weiman v.

McHaffie, 470 So.2d 682, 684 (Fla. 1985) (restricting

enforcement of the clause causes “shortage of mortgage

money” for buyers); Malouff v. Midland Federal Savings &

Loan Ass'n, 509 P.2d 1240, 1244-45 (Colo. 1973) (barring

such clauses would “increase monthly payments and make

the obtaining of such [mortgage] loans prohibitive to many

people” (citation omitted)). Thus, it is no surprise that the

courts in the “majority of jurisdictions” liberally enforce due-

on-sale clauses while only a minority bars their enforcement

under state common law. Lake, 674 P.2d at 423.

In short, it is well-recognized that credit regulations

aimed at protecting consumers may actually hurt them, and it

is entirely reasonable for federal bank regulators to take this

risk into account in carrying out their mission of ensuring

that federal financial institutions are able to provide an

adequate flow of credit to consumers. It is thus not

surprising that Congress has given the OCC the dual function

of overseeing both national banks and the treatment that

10

those banks give to their customers. AARP characterizes

this as a conflict of interest for the OCC, and claims that the

agency supposedly “sides with banks rather than with

consumers.” In fact, as indicated above, the protection of

banks and consumers is inextricably intertwined, and the

OCC’s dual function is far likelier to produce a regulatory

optimum than is Michigan’s approach.

In this case, Michigan, consumer groups, and realtors

ask the Court to reject preemption because it would

supposedly harm consumers. Their position is not based on

new findings. Rather, it is a replay of arguments

unsuccessfully raised over two decades ago in De la Cuesta.

See Amicus Curiae Brief of the Consumers’ Committee to

Protect Mortgage Rights, 1982 WL 60848 (March 26, 1982);

Amicus Curiae Brief of the National Association of Realtors

in Support of Appellees, 1982 WL 608495 (March 27, 1982);

Amici Curiae Brief of Michigan, et al., 1982 WL 608494

(March 29, 1982). Their arguments are as unpersuasive now

as they were then.°

* In the words of one GAO report, “OCC’s mission focuses on the

chartering and oversight of national banks to assure their safety and

soundness and on fair access to financial services and fair treatment of

bank customers.” General Accounting Office, OCC Preemption Rules

(Report GAO-06-387) at pg. 5 (April 2006) (available at

www .gao.gov/new.items/d06387.pdf). As the report explains, “In

addition to exercising its supervisory responsibilities under the National

Bank Act, which include consumer protection, OCC enforces other

consumer protection laws. They include the Federal Trade Commission

Act or FTC Act, which prohibits unfair and deceptive practices, and the

Federal Home Ownership and Equity Protection Act, which addresses

predatory practices in residential mortgage lending. With respect to real

estate lending, other consumer protection laws that national banks and

their operating subsidiaries are subject to include, but are not limited to,

the Truth in Lending / .t, the Home Mortgage Disclosure Act, the Fair

Housing Act, and the Equal Credit Opportunity Act.” Jd. at 6.

* AARP argues that, in “comparison to the federal government, states are

more familiar, accessible, and accountable to their constituencies and are

1]

Ill.

ECONOMIC STUDIES INCREASINGLY

DEMONSTRATE THE HARMFUL EFFECTS OF

CONSUMER CREDIT REGULATION

Economic studies demonstrate that consumers suffer

as a result of consumer credit regulations. In the words of

one study, in “the longer run, the costs of [consumer credit]

regulation are passed on to consumers in one way or

another.” Richard L. Peterson, 7he Costs of Consumer

Credit Regulation at 3 (Credit Research Center Reprint #13,

1979) (www.business.gwu.edu/research/centers/fsrp/pdf/

Reprintl3.pdf). See, e.g, Mark Meador, The Effects of

Mortgagee Laws on Home Mortgage Rates, 34 J. Econ. &

Bus. 143 (1981) (concluding that borrower protection laws

place upward pressure on the interest rates charged by

lenders).

better positioned to act as laboratories of experimentation in areas as

fundamental as home lending.” AARP brief at 6. But AARP itself is

actively promoting its own model law for state mortgage regulation

across the country. AARP, Home Loan Protection Act: A Model State

Statute, www.aarp.org/research/legis-polit/legislation/_aresearch-import-

174-D17346.html. Apparently, AARP’s espousal of _ state

experimentation is secondary to its own agenda for regulation

As for Consumers Union and the other consumer groups on the AARP

brief, one legal commentator has noted such “groups have not joined the

preemption debate” out of principle, but rather because they believe that

state laws are a tool for goading Congress into action; “These groups do

not actually want 50 different state laws that protect consumers in various

lending situations to varying degrees. They would prefer a federal

standard” that is the same for “‘all consumers” throughout the nation, but

they believe that “state laws provide Congress with the necessary impetus

to act.” Mark Furletti, Zhe Debate Over the National Bank Act and the

Preemption of State Efforts to Regulate Credit Cards, 77 Temple L. Rev.

425, 449 (2004) (citing a Consumers Union lobbyist).

12

As one scholar noted, the due-on-sale clauses upheld

against state regulation by this Court in De la Cuesta

“contribute economic benefit to borrower and lender alike”

by keeping interest rates down, fostering the “flow of funds”

into state mortgage markets, and helping “to ensure the

continued availability of the fixed-rate mortgage, a popular

instrument from the borrower’s perspective”; accordingly,

federal preemption of state “restrictions on the enforcement

of due-on-sale clauses benefits both lenders and borrowers.”

Eric J. Murdock, The Due-on-Sale Controversy: Beneficial

Effects of the Garn-St. Germain Depository Institution Act of

1982, 1984 Duke L. J. 121, 137, 140 (1984); see also

Richard T. Pratt & Tim S. Campbell, An Economic Analysis

of the "Due on Sale" Clause in California Mortgage Markets

5 (Credit Research Center (CRC) Working Paper #14, Jan.

1979) (www.business.gwu.edu/research/centers/fsrp/pdf/

Monol4.pdf) (“economic analysis of the ‘due on sale’ clause

. .. demonstrates why unrestricted use of the clause is in the

interest of both borrowers and lenders”).°

® See also Grant S. Nelson & Dale A. Whitman, Congressional

Preemption of Mortgage Due-on-Sale Law: An Analysis of the Garn-St.

Germain Act, 35 Hastings L.J. 241, 310 (1983) (arguments for restricting

due-on-sale clauses are “not logical”); Thomas Kinzler, Due on Sale

Clauses: The Economic and Legal Issues, 43 U. Pitt. L. Rev. 441, 460

(1982) (“mortgagors as a whole will benefit through enforcement of [the

due on sale clause] because lenders will continue to offer a fixed rate

mortgage” and “will be able to charge lower interest rates,” and because

enforcing them “insures a supply of mortgage funds for tomorrow's

mortgages”); Alan J. Blocher, Due-on-Sale in the Secondary Mortgage

Market, 31 Cath. U. L. Rev. 49, 95, 99 (1981) (barring enforcement of

due-on-sale clause will drive up interest rates for future borrowers; “the

costs will be borne most heavily by those on relatively fixed incomes,

such as the elderly or low-income groups”; and the patchwork of state

laws in this area restricting such clauses reduces “the supply of

conventional mortgage funding”); Bartke & Tagaropulos, Michigan's

Looking Glass World of Due-on-Sale Clauses, 24 Wayne L. Rev. 971,

1002 (1978) (“A question legitimately may be asked whether a consumer,

who is protected to the point that he or she can no longer get home

13

This is especially true for the interest-rate ceilings

contained in state usury laws. As a senior economist at the

Federal Reserve noted, “The unanimous or near unanimous

view of the profession” of economists is that “ceilings or

controls of interest rates have been a bad idea for a long time

and will continue to be a bad idea in the future.”’ “Nobel

Laureate Milton Friedman spoke well for the entire

profession in 1970 when he reported, ‘I know of no

economist of any standing . . . who has favored a legal limit

on the rate of interest that borrowers could pay or lenders

999

receive.””® -

Although interest rate ceilings are intended to help

borrowers, they actually harm them, since “controls create

credit shortages, they impede competition, they waste

resources, and probably most tellingly, they do not work

anyway.” They dry up the flow of credit to the low-income

and high-risk borrowers they seek to help, forcing borrowers

to turn to loan-sharks and disguised loans, such as

installment purchases at inflated prices. See, e.g.,

Christopher DeMuth, The Case Against Credit Card Interest

financing because the sources of funds have dried out, is that much better

off than before”’).

’ Thomas Durkin, An Economic Perspective on Interest Rate Regulation,

9 Ga. St. U. L. Rev. 821, 837 (1993) (www.business.gwu.edu/research/

centers/fsrp/pdf/Reprint22.pdf).

8 Jd. at 821 (quoting Milton Friedman, Defense of Usury, Newsweek,

Apr. 6, 1970, at 79).

* Id. at 837. See also Crafton, An Empirical Test of the Effect of Usury

Laws, 23 J.L. & ECON. 135, 140 (1980) (Usury laws lead to a decrease

in mortgage loan origination); Nathan, Economic Analysis of Usury Laws,

10 J. BANK RES. 200, 204 (1980) (“{Rjesearch indicates that usury

restrictions have limited the flow of credit to mortgage markets.”); Ostas,

Effects of Usury Ceilings in the Mortgage Market, 21 J. FIN. 821, 831

(1976) (usury laws reduced mortgage loan volume).

14

Rate Regulation, 3 Yale Journal of Regulation 201, 221

(1986) (“By effectively segmenting the supply of credit and

reducing the competition faced by the firms who are superior

repricers, usury controls raise net costs of credit. This was

the conclusion of one recent study which found that usury

controls significantly reduced price competition between

finance companies and banks,” citing A. Sullivan, Effects of

Consumer Loan Rate Ceilings on Competition Between

Banks and Finance Companies 20-22 (1981) (CRC Working

Paper No. 38); see also Michael E. Staten & Robert W.

Johnson, The Case for Deregulating Interest Rates in

Consumer Credit 7, 38, 48, 50 (CRC Monograph #31, 1995)

(www.business.gwu.edu/

research/centers/fsrp/pdf/Mono3 1 .pdf).

As one economic study observed,

e “rate ceilings that are thought to ‘protect’ consumers

do not protect consumers and do clear harm to those

at the bottom of the economic ladder,” since they

“reduce the number of loans made” and “are most

harmful to citizens they were apparently designed to

protect -- relatively poor credit risks.””'®

e “rate ceilings on loans” indirectly “heap distress on

consumers” by cutting off credit and Giving a to

alternatives like pawnshops and loan sharks;'' an

e “Restrictive rate ceilings on cash credit force lenders

to deny credit to consumers who pose a high risk or

desire only small amounts of credit. Those excluded

consumers are typically young, have short-time on the

'° Staten & Johnson, The Case for Deregulating Interest Rates in

Consumer Credit 7, 50 (quoting former Labor Secretary Robert B. Reich)

" Td at 38.

15

job, are renters, and are unskilled workers with

relatively low incomes. Not only do ceilings ration

customers out of the legal market, but they also drive

smaller lenders from the market and thereby diminish

competition.”"”

Thus, it was consumers who ultimately benefited

from this Court’s decision in Marquette National Bank v.

First Omaha Serv. Corp., 439 U.S. 299 (1978), which held

that the National Bank Act preempted state credit card

interest rate ceilings except for those imposed by the national

bank’s home state. See, e.g., Todd Zywicki, The Economics

of Credit Cards, 3 Chapman L. Rev. 79, 147 (2000) (“by

eliminating archaic and largely ineffective usury restrictions,

Marquette increased efficiency and competition in the credit

card industry, made the market more responsive to consumer

demand, and provided large benefits to consumers”’).

Similarly, state laws that limit creditor remedies

against debtors, such as garnishment, increase interest rates,

drive up the cost of credit, and reduce its availability to needy

consumers. See, e.g., Richard L. Peterson & James R. Frew,

Creditor Remedy Restrictions and Interstate Differences in

Personal Loan Rates and Availability: A Supplementary

Analysis 1, 8 (CRC Working Paper #14, 1977)

(www.business.gwu.edu/research/centers/fsrp/pdf/WP 14.pdf)

(“‘many restrictions on creditors’ remedies are likely to reduce

personal Joan availability (per capita) and, to a lesser extent,

increase personal loan finance rates”; for example,

“restrictions on garnishment significantly affected the price

and availability of consumer credit,” leading to “significantly

elevated finance company personal loan rates,” while

“prohibitions against confession of judgment clauses” were

linked to “significant increases in loan rates” and “significant

reductions in bank personal loan credit availability”);

'2 Td at 48.

16

Richard L. Peterson, The Impact of Creditors' Remedies on

Consumer Loan Charges 4, 7 (CRC Working Paper #15,

1977) (www.business.gwu.edu/__research/centers/fsrp/pdf/

WP15.pdf) (“bank auto loan rates [were] significantly higher

in states with the most restrictive creditor remedies,” and “in

every case a lack of restriction on (or prohibition against) a

particular creditors’ remedy was associated with lower loan

rates”; for example, “State restrictions on attorney fee clauses

are associated with 90 basis point increased in bank

consumer loan rates,” and restrictions on garnishment

increase “consumer finance charges”; moreover, “restrictions

on creditors' remedies also induce lenders to reduce their

supplies of consumer credit -- both in the aggregate . . . and

to the most risky borrower groups”).'?

The same is true of state laws aimed at so-called

predatory lending. By placing added restrictions on high-

interest loans, and increasing the liability risks of lenders

who make them, they have many of the same unfortunate

side-effects as usury laws. See Donald Lampe, Wrong from

" See also Norman Geis, Escape from the 15th Century: The Uniform

Land Security Act, 30 Real Prop. Prob. & Tr. J. 289, 300 (1995)

(“Economists have predicted . . . that the increased cost of lending in the

judicial foreclosure states will be reflected in an increased cost of

mortgage borrowing”); accord Durham, Jn Defense of Strict Foreclosure:

A Legal and Economic Analysis, 36 S.C. L. Rev. 461, 495-06, 499 (1985)

(increasing obstacles to foreclosure harms rather than helps consumers);

Anne Bradner, The Secondary Mortgage Market and State Regulation of

Real Estate Financing, 36 Emory L. J. 971, 997 (1987) (“costs are largely

a function of delays built into the system, and the delays [in foreclosure]

harm both mortgagor and muortgagee”), citing Bauer, Judicial

Foreclosure and Statutory Redemption: The Soundness of Iowa's

Traditional Preference for Protection Over Credit, 71 lowa L. Rev. 1, 9-

10, 11-12 (1985); Note, Foreclosures, Redemptions, and Homeowners,

1975 U. Ill. L.F. 335, 358-61; Pedowitz, Mortgage Foreclosure Under

the Uniform Land Transactions Act (As Amended), 6 REAL EST. LJ.

179, 195 (1978); Madway & Pearlman, Mortgage Forms and

Foreclosure Practices. Time for Reform, 9 Real Prop. Prob. & Tr. J. 560,

565 (1974).

17

the Start? North Carolina's ‘‘Predatory Lending” Law and

the Practice vs. Product Debate, 7 Chapman L. Rev. 135,

145 (2004) (studies show that “the North Carolina [predatory

lending] law's ‘triggers’ form usury ceilings on residential

mortgage loans made after the effective date of the law”).

Thus, economic analysis has found that such laws

reduce the availability of credit to lower-income households

while adding little to protections against consumer fraud. See

id. at 144-45; Office of the Comptroller of the Currency,

Preemption Determination & Order, 68 Fed. Reg. 46264,

46271 n.26 (Aug. 5, 2003) (“a growing body of evidence

indicates that state anti-predatory lending laws are likely to

restrict the availability of credit to subprime borrowers”);

OCC Working Paper, Economic Issues in Predatory Lending

at 2 (July 30, 2003) (www.occ.treas. gov/workingpaper.pdf)

(“there is substantial empirical evidence that anti-predatory

statutes can impede the flow of mortgage credit, especially to

low-income and higher-risk borrowers, and that any

reduction in predatory abuses resulting from these measures

is probably achieved at the expense of many legitimate

loans”)."*

* See also Gregory Ellichausen & Michael Staten, Regulation of

Subprime Mortgage Products: An Analysis of North Carolina's Predatory

Lending Law, 29 J. of Real Estate Finance & Economics 41] (2004)

www.business. u/ ‘centers/fi vised W

Robert E. Litan, Unintended Consequences. The Risks of Premature State

Regulation of Predatory Lending (American Bankers Association, 2002)

at 15 www. 0 nl 7 75- -AB7

00508B95258D/28871/PredReport20099 L.pdf) State and loca! laws [on

predatory lending] threaten to dry up credit for the very same population

about which cnitics of predatory lending are most concerned”; risk

“discouraging the supply of credit to higher msk borrowers”; and “reduce

overall lending to subprime borrowers”); OCC Working Paper, Economic

Issues in Predatory Lending at 20 (“There is a good deal of empirical

evidence to suggest that anti-predatory statutes impede the flow of

mortgage credit, especially to low-income and higher-risk borrowers, and

18

For example, Georgia’s predatory lending law

“caused secondary market participants to cease purchasing

certain Georgia mortgages and many mortgage lenders to

stop making mortgage loans in Georgia,” dramatically

reducing the availability of credit. OCC, Bank Activities and

Operations: Real Estate Lending and Appraisals, 69 Fed.

Reg. 1904, 1908 (Jan. 13, 2004); OCC Working Paper,

Economic Issues in Predatory Lending, at 3, 20 (Fannie Mae

and Freddie Mac stopped buying “high cost home loans”

after the Georgia Fair Lending Act passed, and the law

caused “the nation’s seventh largest subprime originator to

stop making all subprime loans in Georgia”).

Less draconian statutes, such as North Caiolina’s

predatory lending law, have also had négative effects on the

availability of credit. “For example, studies of subprime

lending activity in North Carolina before and after enactment

of that state's anti-predatory lending law have shown a post-

enactment decline in subprime mortgage originations of

about 15%.” OCC, Preemption Determination & Order, 68

Fed. Reg. at 46271 n.26, citing Keith D. Harvey & Peter J.

Nigro, Do Predatory Lending Laws Influence Mortgage

Lending?, An -Analysis of the North Carolina Predatory

Lending Law, 29 J. Real Est. Fin. & Econ. 435 (2004),

Ellichausen & Staten, Regulation of Subprime Mortgage

Products: An Analysis of North Carolina's Predatory

Lending Law, 29 J. Real Est. Fin. & Econ. 411 (2004); see

also OCC Working Paper, Economic Issues in Predatory

Lending at 22 (Philadelphia predatory lending ordinance also

found to have likely resulted in reduction in legitimate loans).

any reductions in predatory abuses resulting from these measures if

probably achieved at the expense of many legitimate loans”).

19

AARP claims that such laws reduce predatory lending

without reducing access to credit. See AARP Brief at 10.

AARP’s claims, however, are subject to serious dispute. A

number of analysts have found that North Carolina’s

predatory lending law has in fact reduced the flow of credit

to low-income borrowers. As a result of its passage,

“creditors appear to have sharply restricted lending to higher-

risk customers in North Carolina -- but not to customers in

neighboring states or to lower risk customers in North

Carolina -- after passage of the law.” Elliehausen & Staten,

29 J. Real Est. & Fin. at 412. After the law's passage

“significant declines [in mortgage loans] occurred only in

North Carolina and only among the lower-income borrowers.

Neither the higher-income borrowers in North Carolina nor

borrowers in other states experienced significant declines.”

Id. at 429; see also OCC Working Paper, Economic Issues in

Predatory Lending at 25 (declines were significant and “were

found only in the higher-risk segment of the market”).

Moreover, “the North Carolina statute did impede the flow of

mortgage credit to higher-risk borrowers . . . at the expense

of many legitimate loans.” Ellichausen & Staten, 29 J. Real

Est. & Fin. at 430; see also OCC Working Paper, Economic

Issues in Predatory Lending at 2, 20 (any putative benefits of

the law likely came “at the expense of many legitimate

ioans”); Keith D. Harvey & Peter J. Nigro, Do Predatory

Lending Laws Influence Mortgage Lending?, An Analysis of

the North Carolina Predatory Lending Law, 29 J. Real Est.

Fin. & Econ. 435 (2004). In the words of one analyst,

studies suggest “that the North Carolina ‘predatory lending’

law has led to a reduction in the availability of higher cost or

‘subprime’ mortgage loan credit in the State.” Lampe, 7

Chapman L. Rev. at 144,'5

'* Although a 2002 report from the Center for Responsible Lending

claimed legitimate lending was unaffected, the “evidence presented [in it]

d[id) not support, and often contradict[ed], the report's conclusions,”

since the report ignored important “borrower risk characteristics” to reach

\

20

While AARP faults the OCC for not preventing

predatory lending, the agency does in fact enforce

prohibitions against predatory lending, without using the

counterproductive approach of many state regulators. See

Robert E. Litan, Unintended Consequences: The Risks of

Premature State Regulation of Predatory Lending (American

Bankers Association, 2002) at 15, 34 (www.aba.com/

NR/rdonlyres/D881716A-1C75-11D5-AB7B-00508B95258

D/28871/PredReport200991 pdf) (“federal law already bans

all or virtually all of the practices associated with predatory

lending,” and “recent enforcement activity indicates that the

authorities are taking the problem very seriously”).

The absence of large numbers of enforcement

proceedings simply reflects the fact that it is not banks who

are the primary sources of predatory lending. See OCC

Working Paper at 7 (“There is little data suggesting that

banks themselves are engaged in predatory lending to any

significant degree”); id. at 4 (noting “scant evidence” of

national bank involvement).

its conclusions. Elliehausen & Staten, 29 J. Real Est. & Fin. at 414-15.

Worse, it “excluded the largest category of subprime borrowers [that]

represents the heart of the industry” from the study, eliminating most of

the relevant data) OCC Working Paper at 19 (citing this and other

“weaknesses in the data’”’).

21

CONCLUSION

The decision below should be affirmed, because the

OCC’s interpretation of the statute promotes the purposes of

the National Bank Act by enabling banks to meet the credit

needs of their customers without being subjected to a

hodgepodge of burdensome and wasteful state regulations.

Respectfully submitted,

SAM KAZMAN

HANS BADER*

COMPETTTTVE ENTERPRISE INSTITUTE

1001 Connecticut Ave., NW, Ste. 1250

Washington, D.C. 20036

(202) 331-2278

* Counsel of Record

Dated: November 2, 2006