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Financial Services Law Insights and Observations

California Federal Court Holds Equitable Tolling Applicable to TILA Damages Claim; HOLA Does Not Preempt Certain State Law Claims

State Issues

On February 22, the U.S. District Court for the Eastern District of California held that the doctrine of equitable tolling was applicable to a damages claim under the Truth in Lending Act (TILA) and that the Home Owners’ Loan Act (HOLA) did not preempt claims of fraudulent omissions and certain claims under the California Unfair Competition Law (UCL). Yang v. Home Loan Funding, Inc., No. CV F 07-1454, 2010 WL 670958 (E.D. Cal. Feb. 22, 2010). In this case, the plaintiff borrowers proposed a class of borrowers who obtained Pay Option Adjustable Rate Mortgages (ARMs) from the defendant lenders. According to the borrowers, the ARMs were “designed to, and always would, cause negative amortization” because the margin rate of the loans was always greater than the teaser rate. The borrowers subsequently filed claims against the lenders under TILA and the California UCL, as well as claims under state common law. With respect to the borrowers’ TILA claim, the court held that it could not conclude that the complaint failed to support a claim for rescission. The court further concluded that that the doctrine of equitable tolling was applicable to the TILA damages claims because the borrowers alleged that they “were not informed of the sharp increase in the interest rate [of the ARM], and the fact that their monthly payments were not enough to pay the interest accruing on the loan, until they had made multiple payments following the closing of the loan.” Regarding the borrowers’ common law claim of fraudulent omissions and statutory claim under the UCL, the court held that HOLA did not preempt these claims. However, the court recognized that, to the extent such claims “attempt to impose liability under state law against [the federal thrift] for acts actually committed by [the federal thrift] that fall within the preemptive scope of [HOLA], those claims would be held preempted.” The court further held that TILA does not preempt the plaintiffs’ UCL claims to the extent those claims are based on allegations of oral misrepresentations amounting to fraud, but TILA does preempt those claims based on allegations of written deficiencies in the Truth in Lending Disclosure Statements. Finally, with respect to the plaintiffs’ breach of contract and unjust enrichment claims, the court found that the ambiguity of several terms (e.g., the calculation of the interest rate and the timing of the interest rate changes during at least the first year of the loan) in the loan contract warranted denial of the motions to dismiss.

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