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Financial Services Law Insights and Observations

Texas Federal Court Finds FCRA Does Not Completely Preempt State Law

State Issues

On September 29, the U.S. District Court for the Southern District of Texas held that the Fair Credit Reporting Act (FCRA) did not completely preempt a borrower’s state law claims against a mortgage servicer. Ortiz v. National City Home Loan Services Inc., Civ. No. H-09-2033, 2009 WL 3255088 (S.D. Tex. Sept. 29, 2009). In this case, the defendant servicer deducted a portion of the borrower’s monthly mortgage payment to cover required insurance on the borrower’s property, thereby resulting in a shortage in the borrower’s Promissory Note obligation. As a result of the shortage, the servicer filed foreclosure proceedings against the borrower. Subsequently, the borrower alleged that the servicer damaged his credit by wrongfully reporting to credit reporting agencies that there was a delinquency in the mortgage payments and claimed violations of the Texas Deceptive Trade Practices – Consumer Protection Act, as well as claims of slander of credit and wrongful foreclosure. The defendant servicer attempted to remove the proceedings to federal court by arguing that the borrower’s state law claims were totally preempted by FCRA and, thus, gave rise to federal question jurisdiction. The court held that (i) FCRA only preempts state law claims when the relevant state law conflicts with FCRA and that no such conflict exists between FCRA and the relevant Texas law, and (ii) in any event, preemption is merely an affirmative defense that is not a basis for removal.