Plaintiff, an elderly homeowner with an existing mortgage on her home, entered into a reverse mortgage through HUD. After Plaintiff entered into the reverse mortgage agreement, Plaintiff refinanced her reverse mortgage with defendant Home Loan Investment, F.S.B. ("Home Loan"). Home Loan then transferred Plaintiff's loan to defendant Citimortgage, Inc. ("Citimortgage"). Plaintiff subsequently refinanced the mortgage loan from Home Loan with defendant Advanced Financial Services, Inc. ("Advanced"). Plaintiff alleged that she had no recollection of entering into a loan agreement with either Home Loan or Advanced. When Advanced threatened foreclosure, Plaintiff filed this action, alleging, among other things: 1) negligence of Home Loan: 2) unfair or deceptive acts and practices of Home Loan: 3) unconscionable conduct of all defendants; and 4) assignee liability on the part of Citimortgage. Defendant Home Loan filed a motion to dismiss for failure to state a claim, asserting that: 1) the Home Owners' Loan Act of 1933 ("HOLA") and its accompanying regulation, 12 C.F.R. § 560.2, preempted all of plaintiff's claims against Home Loan and 2) plaintiff's claims for unfair and deceptive acts and practices and unconscionable conduct were time-barred. Citimortgage filed a motion to dismiss as well, incorporating all of Home Loan's arguments and this opinion followed.
As you may recall, HOLA granted the Office of Thrift Supervision ("OTS") authority to regulate federal savings and loan banks and under this authority, OTS promulgated a preemption regulation in 12 C.F.R. § 560.2 to provide consistent national regulations and to preempt state laws that burden federal saving and loan banks from freely exercising their federally-granted powers. In 61 Fed Reg. 50951, OTS outlined the proper analysis for courts to employ when confronted issues of whether a state law is preempted by HOLA and 12 C.F.R. § 560.2, pursuant to which a court is to first determine whether plaintiff's state law claims fall within section 560.2(b) of the regulation, which provides illustrative examples of the types of state laws preempted. If the answer is yes, plaintiff's claim is preempted, if the answer is no, the court is to then determine whether plaintiff's state law claim affects lending and if so, whether it clearly falls into section 560.2(c) of the regulation, which provides categories of state laws that are not preempted to the extent that they only incidentally affect lending operations.
The court first addressed Home Loan's preemption claims under HOLA and 12 C.F.R. § 560.2, along with Plaintiff's counter-argument that her claims fell within the exceptions to preemption provided for in 12 C.F.R. § 560.2(c). Noting that the Fourth Circuit has yet to consider the application of section 560.2 to state law claims, for guidance the court looked to decisions from the the Seventh, Eighth and Ninth Circuits, all of which took a similar approach to interpreting section 560.2, which involved looking at the each of a plaintiff's underlying allegations and the specific nature of each state law claim individually to determine whether an allegation is a state-based cause of action or an attempt at regulation preempted by section 560.2(b). Accordingly, the court looked at each of Plaintiff's claims individually to determine if they were preempted by HOLA.
The court first looked at Plaintiff's claim that Home Loan was negligent in ignoring Plaintiff's grant of a publicly recorded power of attorney, finding that placing a duty on a federal savings and loan bank to inquire further into the discovery of a power of attorney on the record would place a significant burden upon federal savings and loan banks during the '[p]rocessing, origination, servicing, sale or purchase of, or investment or participation in, mortgages," such that this particular state law claim "more than incidentally affects lending" and would fall into the category of claims that are preempted by section 560.2(b). The court next looked at Plaintiff's claim that Home Loan was negligent by failing to determine whether Plaintiff could afford the mortgage loan, finding that placing such a burden on a federal savings and loan bank would force such banks to engage in comprehensive calculations of the income and expenditures of mortgage applicants which more than incidentally affects lending and accordingly, this claim was preempted by section 560.2(b) as well.
The court also looked to whether Plaintiff's claim that Home Loan engaged in unconscionable conduct by unconscionable inducement into the mortgage loan was preempted by section 560.2(b), finding that Plaintiff's claims would require federal savings banks to make determinations of, among other things, whether borrowers can afford the loan and whether borrowers will live long enough to repay the loan, and because, according to the court, only the OTS can compel federal savings banks to engage in complex assessments of borrowers' financial and other conditions, "any attempt to impose similar requirements through state law is preempted by HOLA."
Additionally, the court found that Plaintiff failed to state a claim against Home Loan for unfair/deceptive acts and practices under the West Virginia Consumer Credit and Protection Act, and accordingly these claims were dismissed against Home Loan. The court also found that Plaintiff's negligence claims were not barred by West Virginia's applicable two-year statute of limitations, but that her unfair/deceptive acts claims and her unconscionable conduct claim were barred by West Virginia's applicable one-year statute of limitations, and accordingly, these claims were dismissed with prejudice.
Finally, as to Citimortgage, the court found that to the extent Plaintiff's claims were dismissed against Home Loan, the claims were also dismissed against Citimortgage, as assignee of Home Loan.
Ralph T. Wutscher
Kahrl Wutscher LLP
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