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Financial Services Law Insights and Observations

California Federal Court Finds Certain California State Law Claims Preempted by HOLA

State Issues

On January 27, the U.S. District Court for the Southern District of California held that certain state law claims arising from the origination of a mortgage loan were preempted by the Home Owners Loan Act (HOLA) and OTS regulations. Ibarra v. Loan City, No. 09-CV-02228 (S.D. Cal. Jan. 27, 2010). In Ibarra, the plaintiff borrower alleged that his loan servicer (i) violated the California Business and Professions Code § 17200, (ii) engaged in predatory lending, constructive fraud, fraud, and negligent misrepresentation, and (iii) breached its fiduciary duty to him in connection with the origination of his mortgage loan. The servicer – a wholly owned operating subsidiary of a federally chartered bank – moved to dismiss, arguing, among other things, that the borrower’s state law claims were preempted by HOLA and OTS regulations. The court granted the motion in part, and denied it in part. Specifically, the court held that the borrower’s claims of constructive fraud, fraud, and negligent misrepresentation, as well as a portion of plaintiff’s § 17200 claim – each of which were based on alleged misrepresentations relating to the terms of the loan – were not preempted. According to the court, “when plaintiffs rely on the duty not to misrepresent material facts, which is generally applicable to all businesses, and when application of the law would not regulate lending activity, such claims are not preempted.” On the other hand, the court found that the borrower’s claim under California’s predatory lending laws were preempted because those laws “explicitly impose requirements of the type listed in [HOLA] Section 560.2(b), including ‘loan-related fees’ and ‘terms of credit,’ ‘disclosures,’ and the ‘processing, origination, servicing, sale or purchase of, or investment or participation in, mortgages.’” As such, these claims would more than “incidentally affect the lending operations of Federal savings associations.” Likewise, the court found that the borrower’s § 17200 claim – to the extent that it was based on claims that the servicer violated state lending laws and failed to extend loan modification assistance – was preempted because it “explicitly affects banking and lending.” Notably, the court did not decide whether the borrower’s breach of fiduciary duty claim was preempted, because, according to the court, “it is well established that a financial institution owes no duty of care to a borrower when the institution’s involvement in the loan transaction does not exceed the scope of its conventional role as a mere lender of money.”

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