Federal Preemption

Section 766.565(5),Wis. Stats. (PDF: external link), the provision permitting a creditor to include in an open-end home equity agreement authorization to declare the account balance due and payable upon receiving notice of termination from a non-obligor spouse was preempted by the Board of Governors of the Federal Reserve System as being inconsistent with federal law.

The Board noted in its proposal for preemption that a strict application of the federal preemption standards to the state law would suggest that the entire state provision is consistent with the federal law, but that valid reasons exist for not preempting the right of the non-applicant spouse to terminate a plan. These include Wisconsin’s declared interest in protecting certain marital property rights by effectively deeming a non-obligor spouse to be a "consumer" specifically for purposes of terminating an open-end credit plan; and that precedent exists under federal Regulation Z for deeming a non-incurring person who has an ownership interest in the property that secures a plan to be a "consumer" and thus able to terminate the plan.

The Board decided a similar basis could not be found for permitting a creditor to interfere with the operation of the federal scheme by accelerating the outstanding balance in such cases. The Board determined that   Sec. 766.565(5),Wis. Stats. (PDF: external link), permitting a non-obligor spouse to terminate a home equity plan, is not preempted. The provision permitting a creditor to accelerate the outstanding balance in such cases is preempted.