Sunday, January 1, 2012

FYI: 6th Cir Upholds HOLA Preemption of Allegedly Usurious Prepayment Penalty, But Allows Related Breach of Contract Claim

The U.S. Court of Appeals for the Sixth Circuit recently held that two borrowers' cause of action relating to an allegedly excessive prepayment penalty under the Michigan Usury Act was preempted, but that the borrowers' cause of action based on the contractual loan agreement was not.   
A copy of the opinion is available at:
Two borrowers paid off their mortgage early, and were charged fees in connection with the prepayment by their servicer.  Their mortgage allegedly provided that prepayments could be made without paying an extra charge.  The borrowers sued, alleging violations of the Michigan Usury Act, and breach of contract, among others. 
The lower court dismissed the suit, on the grounds that the borrowers' claims were preempted by the Home Owners' Loan Act ("HOLA").  The borrowers appealed. 
The Sixth Circuit confirmed that the Dodd-Frank Act amendments affecting preemption under HOLA are not retroactive.  Thus, preemption based on HOLA was at the time of the challenged charges governed by the implementing regulations of the Office of Thrift Supervision ("OTS").  Those implementing regulations provide that "state laws purporting to impose requirements regarding... loan related fees..." are preempted by HOLA.  12 C.F.R. Sec. 560.2(b). 
On appeal, the Sixth Circuit drew a distinction between "[s]tate laws that propose to regulate a federal organization's lending activities" and actions based on contractual provisions that are "imposed by the contracting party upon itself."  It noted that the Michigan Usury Act, which prohibits charging certain prepayment fees, falls into the preempted category relating to lending activities, whereas the borrowers' breach of contract claim falls into the non-preempted category relating to contracts
The Sixth Circuit held that because the Michigan Usury Act is "the type of state law explicitly listed as preempted" in HOLA's implementing regulations, the lower court properly dismissed the borrowers' claim based on that Act. 
In addition, even though the federal savings association servicer did not extend the loans at issue, the Sixth Circuit held that "[c]ontrary to the Moloskys' claims, HOLA preemption is applicable in situations where, as here, a federal savings association did not originate the loan but instead later serviced it."
The Sixth Circuit came to the opposite conclusion with regard to the borrowers' breach of contract claim.  It noted that state contract and commercial law are specifically exempted from preemption, if such laws "only incidentally affect the lending operations of Federal savings associations..."  12 C.F.R. Sec 260.2(c).  Although the Court acknowledged that state contract law which "seeks to effectuate a state's public policy" might be preempted by HOLA, it nevertheless observed that "state contract law that seeks to effectuate the intent of the parties" is not. 
Therefore, the Sixth Circuit held that the borrowers' breach of contract claim was not preempted by HOLA, and remanded the matter back to the lower court for further proceedings.  
In addition, the Court held that "M.C.L. § 565.41 does not prohibit the charging of recording fees," and therefore the borrowers failed to state a claim under state law relating to the servicer's charges for recording fees for the release of lien. 
Likewise, the Court held that the borrowers failed to state a claim under Michigan Consumer Protection Act, M.C.L.§ 445.901 et seq., because the Michigan Consumer Protection Act by its own terms does not apply to activities authorized under federal law, which here included a federal savings association's servicing of residential mortgage loans and recording releases of related liens.
The Sixth Circuit also held that the borrowers' allegations that the servicer violated RESPA in connection with its charges for recording fees relating to the releases of liens "failed to state a claim under RESPA because 12 U.S.C. § 2607, under which they have brought their claim, does not apply to fees assessed after a property's settlement."

Ralph T. Wutscher
McGinnis Tessitore Wutscher LLP
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Chicago, Illinois 60602
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