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Dreher Tomkies LLP
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Columbus, Ohio 43215
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GOVERNING LAW PROVISION CAN OVERRIDE FEDERAL PREEMPTION

Lenders relying on federal preemption need to review their governing law provisions to ensure that they are not contract more home state law than they intend.

Federal preemption is a matter of federal law and a specific statement in a contract is not required for a lender to rely on federal preemption. However, it is possible for a lender and a borrower to agree by contract to terms that are more restrictive than those that the lender is otherwise required to comply with under federal law.

In Wells v. Chevy Chase Bank, F.S.B., 377 Md. 197 (2003), credit cardholders brought action against an issuing federal savings bank alleging that the bank violated a provision of the credit card agreement when it raised fees without giving the notice required by Maryland Subtitle 9.

The cardholder agreement stated, We may amend the terms of this Agreement in accordance with applicable law at any time. The cardholder agreement contained a governing law provision This Agreement is made in Maryland. It is governed by Subtitle 9 [Credit Grantor Revolving Credit Provisions] of Title 12 [Credit Regulations] of the Commercial Law Article of the Maryland Annotated Code and applicable federal laws.

The cardholders sued the lender on a breach of contract theory. The court stated that Subtitle 9 is a state law that falls within the category of state imposed obligations that 12 C.F.R. 560.2 preempts. Thus, the court and the parties agreed that the bank was not required to comply with Subtitle 9 by statute. The court, however, recognized that Section 560.2 expressly exempts from preemption contract law and thus a federal savings banks contractual undertakings are not preempted. The court concluded that Subtitle 9 was relevant to the case because the agreement between the parties referred to it. The court remanded the case to the lower court to apply state law contract interpretation to determine the parties rights and obligations under the agreement. The case illustrates that careful consideration must be given to the governing law provision in contracts entered into by lenders with federal preemption authority.

Darrell Dreher and Elizabeth Anstaett