VA Federal Court: HOLA Preempts Tort Claims Alleging Savings Bank Posed as Lender to Collect Fees

Posted on April 11, 2011 by Fred Rivera

April 4, 2011 - The U.S. District Court for the Eastern District of Virginia held that the Home Owner's Loan Act (HOLA) preempts state tort law claims alleging that Flagstar Bank F.S.B. improperly represented itself as as a lender to collect brokerage fees on a home mortgage (Down v. Flagstar Bank F.S.B., E.D. Va., No. 3:10-cv-847, 4/4/11). 

The plaintiff (borrower) asserted "bait and switch" claims under Virginia law, alleging that Flagstar used a Good Faith Estimate to pose as the lender in order to collect brokerage fees.  The borrower claimed that he paid fees and rates than he could have avoided by dealing directly with the lender, First National Bank of Arizona. 

Flagstar removed the case to federal court, arguing that HOLA preempts the Virginia claims.  The federal court (J. O'Grady) agreed. Although HOLA regulations (12 C.F.R §560.2(c)(4)) includes an exception to the normal preemption for tort law claims that only "incidentally affect the lending operations," the exception did not apply in this instance because  Flagstar's representations about its role and the loan transaction are “inextricably linked to one another.”
 
“If a plaintiff were permitted to allege fraud and to receive the return of fees required to be disclosed by RESPA in state court, state courts would be left to interpret the RESPA statute and regulations, analyzing a defendant's compliance in each individual case—and this is precisely what federal preemption intends to avoid.”
 
The Court's holding recognizes the broad reach of HOLA preemption, and evidences a federal court's willingness reject one of the special preemption exceptions in the post Dodd-Frank era.

Full Opinion.

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Supreme Court Decides Preemption -- States Can Probe National Banks

Posted on July 1, 2009 by Fred Rivera

In a highly anticipated decision, a divided U.S. Supreme Court  authorized states to investigate national banks for lending discrimination, thus rejecting the OCC's position that its regulatory authority preempted states' enforcement powers.   In the 5-4 opinion authored by Justice Scalia, the high court in Cuomo v. Clearing House Association, LLC held that federal banking regulations did not pre-empt states from enforcing their own fair-lending laws.

The ruling decided a dispute between the OCC and the New York attorney general's office, which had initiated investigations into national banks' residential real-estate lending practices.  Former Attorney General and Governor Eliot Spitzer initiated the investigation of several banks, including Wells Fargo, JPMorgan Chase and Citigroup, based on mortgage data he claimed showed black and Hispanic borrowers received a larger percentage of high-interest home loans than white borrowers.

CNN reported the mixed reactions to the ruling.  The American Bankers Association issued a statement contending that the ruling "changes over 140 years of settled law," and expressed concern that national banks will  "face a patchwork of duplicative and conflicting federal and state regulation and enforcement actions."  On the other hand, current New York Attorney General Cuomo said the ruling "reaffirms the vital role state attorneys general play in protecting consumers from illegal and improper practices by our country's biggest and most powerful banks."  Similarly, the Lawyers' Committee for Civil Rights Under Law applauded the decision, stating in a press release that the the decision "will unshackle the oversight muscle of state attorneys general whose attempts to enforce fair lending laws against national banks were thwarted when most needed." 

 

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