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Thursday, January 12, 2017

Federal Preemption and Mortgage Call Center Recordings

We are a federally chartered savings association and are contemplating opening a mortgage call center.  We are in the process of establishing a call center and, for quality control purposes, would like to record our employees’ calls with our potential customers. We are aware that some states require “two party consent” and others “one party consent”. However, as a federally chartered savings bank, can federal preemption be used to preempt state laws requiring two party consent for the recordation of telephone calls?  

The short answer is that federal preemption cannot be used to preempt state laws requiring two party consent for the recordation of telephone conversations.

Federal law allows the recording of telephone calls with the consent of at least one party. [18 U.S.C. § 2511(2)] The majority of states also follow this “one party consent” rule. However, a minority of states, such as California, Connecticut, Florida, Massachusetts, and Pennsylvania, require the consent of all parties to the communication prior to recordation of the conversation (the “two party consent” rule). If all parties to the conversation are located in the same state, then that state’s laws apply. However, it is often difficult to know where the parties are located while the conversation is taking place, and, for that reason, it is more prudent to follow the two party consent rule.

As to whether the two party consent rule is averted through the doctrine of federal preemption, one must look to the Home Owners Loan Act (“HOLA”). The HOLA expressly provides that Federal regulations occupy the entire field of lending and credit activities and that Federal regulations are to be the governing laws for certain activities. State laws regarding recordation of telephone conversations are not lending laws, but rather wiretapping and privacy laws. As such, the HOLA preemption does not apply to these laws and a federal savings association must comply with the state laws, including those requiring two party consent.

One may assert that the call is a form of advertisement and disclosures related thereto enjoy preemption. However, it’s not the act of soliciting the loan, but the act of recording the conversation which is at issue.  As such, preemption does not apply.

The relevant portion of the HOLA is set forth below.

12 C.F.R. § 560.2: Applicability of law [emphases added]
(a) Occupation of field. Pursuant to sections 4(a) and 5(a) of the HOLA, 12 U.S.C. 1463(a), 1464(a), OTS is authorized to promulgate regulations that preempt state laws affecting the operations of federal savings associations when deemed appropriate to facilitate the safe and sound operation of federal savings associations, to enable federal savings associations to conduct their operations in accordance with the best practices of thrift institutions in the United States, or to further other purposes of the HOLA. To enhance safety and soundness and to enable federal savings associations to conduct their operations in accordance with best practices (by efficiently delivering low-cost credit to the public free from undue regulatory duplication and burden), OTS hereby occupies the entire field of lending regulation for federal savings associations. OTS intends to give federal savings associations maximum flexibility to exercise their lending powers in accordance with a uniform federal scheme of regulation. Accordingly, federal savings associations may extend credit as authorized under federal law, including this part, without regard to state laws purporting to regulate or otherwise affect their credit activities, except to the extent provided in paragraph (c) of this section or §560.110 of this part. For purposes of this section, "state law" includes any state statute, regulation, ruling, order or judicial decision.
(b) Illustrative examples. Except as provided in §560.110 of this part, the types of state laws preempted by paragraph (a) of this section include, without limitation, state laws purporting to impose requirements regarding:
(1) Licensing, registration, filings, or reports by creditors;
(2) The ability of a creditor to require or obtain private mortgage insurance, insurance for other collateral, or other credit enhancements;
(3) Loan-to-value ratios;
(4) The terms of credit, including amortization of loans and the deferral and capitalization of interest and adjustments to the interest rate, balance, payments due, or term to maturity of the loan, including the circumstances under which a loan may be called due and payable upon the passage of time or a specified event external to the loan;
(5) Loan-related fees, including without limitation, initial charges, late charges, prepayment penalties, servicing fees, and overlimit fees;
(6) Escrow accounts, impound accounts, and similar accounts;
(7) Security property, including leaseholds;
(8) Access to and use of credit reports;
(9) Disclosure and advertising, including laws requiring specific statements, information, or other content to be included in credit application forms, credit solicitations, billing statements, credit contracts, or other credit-related documents and laws requiring creditors to supply copies of credit reports to borrowers or applicants;
(10) Processing, origination, servicing, sale or purchase of, or investment or participation in, mortgages;
(11) Disbursements and repayments;
(12) Usury and interest rate ceilings to the extent provided in 12 U.S.C. 1735f-7a and part 590 of this chapter and 12 U.S.C. 1463(g) and §560.110 of this part; and
(13) Due-on-sale clauses to the extent provided in 12 U.S.C. 1701j-3 and part 591 of this chapter.
(c) State laws that are not preempted. State laws of the following types are not preempted to the extent that they only incidentally affect the lending operations of Federal savings associations or are otherwise consistent with the purposes of paragraph (a) of this section:
(1) Contract and commercial law;
(2) Real property law;
(3) Homestead laws specified in 12 U.S.C. 1462a(f);
(4) Tort law;
(5) Criminal law; and
(6) Any other law that OTS, upon review, finds:
(i) Furthers a vital state interest; and
(ii) Either has only an incidental effect on lending operations or is not otherwise contrary to the purposes expressed in paragraph (a) of this section.

Joyce Wilkins Pollison, Esq.
Director/Legal and Regulatory Compliance
Lenders Compliance Group