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Financial Services Law Insights and Observations

Illinois Federal Court Holds Federal Law Preempts State Law Claims Pertaining to Forced Insurance

State Issues

On March 30, the U.S. District Court for the Northern District of Illinois held that the Home Owners Loan Act (HOLA) and Office of Thrift Supervision (OTS) regulations preempted certain state law claims against a savings and loan association. Schilke v. Wachovia Mortgage, FSB, No. 09-cv-1363, 2010 WL 1252688 (N.D. Ill. Mar. 30, 2010). In Schilke, the plaintiff borrower obtained a home mortgage from the defendant savings association (the S&L). The loan terms required the borrower to maintain hazard insurance on her home and provided that, if she failed to maintain such insurance, then the S&L would purchase hazard insurance to protect its rights in the property. The S&L disclosed to the borrower that, if it purchased hazard insurance on behalf of the borrower, which it did, it would adjust the borrower’s mortgage payment to cover the insurance premiums, and that the premiums included compensation to the S&L. The borrower then brought this action, asserting claims for violations of the Illinois Consumer Fraud and Deceptive Business Act (ICFA), common law fraud, conversion, and unjust enrichment. These claims were premised on the allegation that the insurance premiums included undisclosed fees.

The S&L moved to dismiss, arguing that HOLA and OTS regulations preempted the borrower’s claims. The court stated that, while OTS has promulgated two preemption regulations under HOLA, certain state laws are not preempted to the extent they are laws of general applicability that only incidentally affect banking activities. The court found that the borrower’s claims were based on laws of general applicability, but that federal law may still preempt the claims if “the state law as applied would regulate lending activities of federal savings associations.” The court found that borrower’s state law claims were at least partly premised on the allegation that the S&L did not disclose that the insurance premium included fees paid to the S&L for the placement, maintenance, and servicing of the insurance. Thus, the court concluded, the borrower sought to use state laws to regulate the S&L’s ability to require private mortgage insurance, impose loan-related fees, and disclose loan terms. Therefore, the court held that federal law preempted the borrower’s claims. The court noted that, while the borrower’s claims of misrepresentations about the amount of fees might not be preempted, there were no actionable misrepresentations here because the loan agreement and S&L’s letters accurately represented the amount of the fees and that premiums would include payments to the S&L. Finally, with respect to the insurer, the court dismissed all claims under the filed rate doctrine – which forbids courts from invalidating or altering rates that were filed with regulatory agencies – except for the ICFA injunctive relief claim, which was dismissed because borrower failed to show that the insurer was the proximate cause of her alleged injuries.

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