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  • HOLA preemption question moves to 9th Circuit

    Courts

    On February 27, the U.S. District Court for the Northern District of California granted a national bank’s request to certify for interlocutory appeal whether state law claims involving interest on escrow accounts were preempted by the Home Owners Loan Act (HOLA). As previously covered by InfoBytes, three plaintiffs filed suit against the bank, arguing that it must comply with a California law that requires mortgage lenders to pay interest on funds held in a consumer’s escrow account, following the U.S. Court of Appeals for the 9th Circuit’s decision in Lusnak v. Bank of America. The bank moved to dismiss the action, arguing, among other things, that the claims were preempted by HOLA. The court acknowledged that HOLA preempted the state interest law as to the originator of the mortgages, a now-defunct federal thrift, but disagreed with the bank’s assertion that the preemption attached throughout the life of the loan, including after the loan was transferred to a bank whose own lending is not covered by HOLA. Specifically, the court looked to the legislative intent of HOLA and noted it was unclear if Congress intended for preemption to attach through the life of the loan, but found a clear goal of consumer protection.

    By granting the motion for interlocutory appeal, the court noted that the frequency with which the HOLA issue arises, “weighs in favor of allowing the Ninth Circuit to resolve this question.” Moreover, the court cited to a recent 9th Circuit case, in which the appellate court recognized HOLA preemption as a “novel legal issue.” The court also temporarily granted the bank’s request to stay the proceedings pending the resolution of the 9th Circuit action.

    Courts Mortgages Escrow HOLA Ninth Circuit Appellate State Issues

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  • District Court rejects dismissal bid for California interest on escrow class action

    Courts

    On December 7, the U.S. District Court for the Northern District of California denied a bank’s motion to dismiss a putative class action alleging the bank violated the California Unfair Competition Law (UCL) by not paying interest to residential mortgagors on funds held in escrow accounts, as required by California law. The three plaintiffs filed the complaint against the bank after the March decision by the U.S. Court of Appeals for the 9th Circuit in Lusnak v. Bank of America, which held that a national bank must comply with a California law that requires mortgage lenders to pay interest on the funds held in a consumer’s escrow account. (Previously covered by InfoBytes here.) The plaintiffs argued that the 9th Circuit decision requires the bank to comply with the California law requiring interest on funds held in escrow.

    In response, the bank filed a motion to dismiss, or in the alternative to stay the case, on the basis that the plaintiffs failed to provide the bank with notice and an opportunity to cure alleged misconduct prior to judicial action as required by the mortgage deed, and that the plaintiff’s claims were preempted by the Home Owners Loan Act (HOLA). The court rejected these arguments, finding that the plaintiff’s failure to comply with the ambiguous provisions in the mortgage deed do not foreclosure their claims, concluding “[t]o deprive Plaintiffs of recourse to their statutory rights based on an ambiguous contractual provision would also frustrate the consumer protection purposes of those statutes.” As to the HOLA argument, the court acknowledged that HOLA preempted the state interest law as to the originator of the mortgages, a now-defunct federal thrift, but disagreed with the bank’s assertion that the preemption attached throughout the life of the loan, including after the loan is transferred to a bank whose own lending is not covered by HOLA. Specifically, the court looked to the legislative intent of HOLA and noted it was unclear if Congress intended for preemption to attach through the life of the loan, but found a clear goal of consumer protection. Therefore, the court concluded that “[a]llowing preemption may run contrary to HOLA's purpose and could result in a gross miscarriage of justice” by depriving homeowners of state law protections.

    Additionally, the court rejected as moot the alternative request to stay the case pending the Supreme Court’s resolution of Lusnak, because the Supreme Court denied the petition of writ in that case in November (covered by InfoBytes here).

    Courts Mortgages Escrow National Bank Act HOLA Dodd-Frank Ninth Circuit Appellate

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  • Supreme Court will not hear 9th Circuit interest on escrow preemption decision

    Courts

    On November 19, the U.S. Supreme Court declined to review the U.S. Court of Appeals for the 9th Circuit’s March decision, which held that a California law requiring banks to pay interest on mortgage escrow funds is not preempted by federal law. As previously covered by InfoBytes, a national bank petitioned for writ of certiorari in August, arguing the 9th Circuit’s decision—holding that the Dodd-Frank Act of 2011 codified the existing National Bank Act preemption standard from the 1996 Supreme Court decision in Barnett Bank of Marion County v. Nelson—warranted further review “because it creates significant uncertainty about whether national banks must comply with similar laws in other states” and whether other state banking laws also apply to national banks. Additionally, the petition argued the uncertainty is exacerbated by the fact that the appellate court “disregarded and refused to enforce longstanding OCC regulations” and that the court interpreted the Barnett decision incorrectly.

    Courts Ninth Circuit Appellate Mortgages Escrow Preemption National Bank Act

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  • National bank petitions for cert in 9th Circuit preemption decision

    Courts

    On August 14, a national bank filed a petition for writ of certiorari with the U.S. Supreme Court requesting review of the U.S. Court of Appeals for the 9th Circuit’s March decision, which held that a California law that requires the bank to pay interest on mortgage escrow funds is not preempted by federal law. As previously covered by InfoBytes, the 9th Circuit held that the Dodd-Frank Act of 2011 essentially codified the existing National Bank Act preemption standard from the 1996 Supreme Court decision in Barnett Bank of Marion County v. Nelson. In May, a panel of three judges on the U.S. Court of Appeals for the 9th Circuit denied the petition for an en banc rehearing. In its petition, the bank argues that the appeals court decision warrants further review “because it creates significant uncertainty about whether national banks must comply with similar laws in other states” and whether other state banking laws also apply to national banks. The petition argues the uncertainty is exacerbated by the fact that the appellate court “disregarded and refused to enforce longstanding OCC regulations.” The bank contends that the 9th circuit interpreted the decision in Barnett incorrectly, and when a state law limits “a national bank’s federal authority to set the terms for their products and services, it is preempted by the National Bank Act.”

    Courts U.S. Supreme Court Writ of Certiorari Ninth Circuit Appellate Escrow Mortgages National Bank Act

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  • Freddie Mac and Fannie Mae release updates to servicing guides

    Federal Issues

    On June 13, Freddie Mac released Guide Bulletin 2018-9, which among other things, updates servicer requirements for short-term, long-term, and unemployment forbearance plans and consolidates the offerings into a single plan. Effective December 1, the streamlined plan will allow servicers to approve forbearance plans lasting up to six months without requiring eligible borrowers to submit a Borrower Response Package. Servicers may also offer consecutive forbearance plans that do not exceed 12 months in total to qualifying borrowers. Separately, the Bulletin includes the introduction of Freddie Mac’s NextJob re-employment services company designed to serve high-needs areas and provide job search skills and training for unemployed or underemployed borrowers who have requested loss mitigation assistance.

    On the same day, Fannie Mae updated its Servicing Guide to consolidate and simplify its forbearance policies into a single plan, and encouraged servicers to implement the changes immediately, but no later than December 1. Fannie Mae clarified, however, that forbearance plans “entered into prior to the servicer’s implementation would adhere to existing policy until the expiration of such forbearance plan.” Additional changes to the Servicing Guide include: (i) clarifications to the escrow advances reimbursement policy for real estate taxes and flood/property insurance premiums; and (ii) updates to be implemented by August 1 for when servicers are required to notify Fannie Mae that a mortgage loan has been placed under military indulgence.

     

    Federal Issues Freddie Mac Fannie Mae Servicing Guide Mortgages Loss Mitigation Flood Insurance Escrow

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  • 9th Circuit will not rehear interest on escrow preemption decision

    Courts

    On May 16, a panel of three judges on the U.S. Court of Appeals for the 9th Circuit denied the petition for an en banc rehearing of its March decision, which held that a California law that requires a bank to pay interest on escrow funds is not preempted by federal law. In addition to the national bank’s appeal for a rehearing, the OCC notably filed an amicus brief supporting the rehearing, arguing that the court “comprehensively misinterpreted” the Supreme Court’s 1996 decision Barnett Bank of Marion County v. Nelson. (Previously covered by InfoBytes here.) The panel noted that the full court had been advised of the bank’s petition for rehearing, and no judge had requested a vote on rehearing.

    Courts Ninth Circuit Appellate Mortgages Escrow Preemption National Bank Act Dodd-Frank OCC State Issues

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  • OCC files amicus brief in support of rehearing in 9th circuit preemption decision

    Courts

    On April 24, the OCC filed an amicus curiae brief in support of an en banc rehearing of the U.S. Court of Appeals for the 9th Circuit’s March decision, which held that a California law that requires the bank to pay interest on escrow funds is not preempted by federal law.  As previously covered by InfoBytes, the 9th Circuit held that the Dodd-Frank Act of 2011 (Dodd-Frank) essentially codified the existing National Bank Act (NBA) preemption standard from the 1996 Supreme Court decision in Barnett Bank of Marion County v. Nelson. 

    In a strongly worded brief, the OCC states that the court “errs in matters of fundamental importance to the national banking system” and “comprehensively misinterpreted” Barnett Bank and the cases upon which that decision rests.  The OCC specifically argues that the court misinterpreted the legal standard for preemption articulated by Barnett Bank, ignored applicable Supreme Court standards prescribing a test for reviewing preemptive regulations, improperly created a burden of proof on national banks to demonstrate Congressional intent as to preemption, and inappropriately imposed a higher bar for “large corporate banks” to show state law interference.  The OCC also argues that the court’s reliance on the effective dates of the Dodd-Frank provisions relied upon by the Court pre-date the transactions that were at issue in the case, and would therefore have no application to the facts of the case.

    This filing supports the national bank’s petition for en banc rehearing filed April 13 and previously covered by InfoBytes here.

    Courts Ninth Circuit Appellate Mortgages Escrow Preemption National Bank Act Dodd-Frank OCC State Issues

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  • Wisconsin repeals mortgage escrow interest requirement

    State Issues

    On April 17, the Wisconsin governor signed AB 822, which eliminates the requirement that financial institutions pay interest on certain residential mortgage loan escrow accounts. Previously, Wisconsin required institutions to pay interest on escrow accounts at a rate of no less than 5.25 percent if the loan was originated between February 1984 and December 1993, or at a variable rate if the loan was originated on or after January 1, 1994. Effective April 17, financial institutions are not required to pay interest on escrow accounts for residential mortgage loans originated on or after the effective date.

    State Issues Mortgages Escrow Interest State Legislation

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  • Bank petitions for rehearing of 9th Circuit preemption decision; OCC to file amicus brief in support of bank

    Courts

    On April 13, a national bank filed a petition for an en banc rehearing of the U.S. Court of Appeals for the 9th Circuit’s March decision, which held that a California law that requires the bank to pay interest on escrow funds is not preempted by federal law. As previously covered by InfoBytes, the 9th Circuit held that the Dodd-Frank Act of 2011 (Dodd-Frank) essentially codified the existing National Bank Act (NBA) preemption standard from the 1996 Supreme Court decision in Barnett Bank of Marion County v. Nelson. The panel cited to Section 1639d(g)(3) of Dodd-Frank, which, according to the opinion, expresses Congress’ view that the type of law at issue does not “prevent or significantly interfere with a national bank’s operations” because the law does not “prevent or significantly interfere” with the national bank’s exercise of its power. Additionally, the 9th Circuit concluded that the OCC’s 2004 preemption regulation had no effect on the preemption standard.

    In its petition for rehearing, the bank argues that the 9th Circuit’s decision, if allowed to stand, “will create confusion regarding which state laws apply to national banks and restrict the terms on which they may extend credit” because the decision conflicts with previous decisions by the same court, the Supreme Court, and other circuits. The bank also acknowledges the OCC’s intent to file an amicus curiae brief in support of the petition no later than April 23.

    Courts Ninth Circuit Appellate State Issues Escrow National Bank Act Mortgages OCC Preemption

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  • 9th Circuit holds California's interest on escrow requirements is not preempted by federal law

    Courts

    On March 2, the U.S. Court of Appeals for the 9th Circuit held that a national bank must comply with a California law that requires mortgage lenders to pay interest on the funds held in a consumer’s escrow account because the law does not “prevent or significantly interfere” with the national bank’s exercise of its power. The case results from a 2014 lawsuit in which a consumer sued the national bank for refusing to pay interest on the funds in his mortgage escrow account as required by a California state law. The district court dismissed the action, holding that the California state law interfered with the bank’s ability to perform its business making mortgage loans and therefore, was preempted by the National Bank Act (NBA).

    In reversing the district court’s decision, the 9th Circuit held that the Dodd-Frank Act of 2011 (Dodd-Frank) essentially codified the existing NBA preemption standard from the 1996 Supreme Court decision in Barnett Bank of Marion County v. Nelson. The panel cited to Section 1639d(g)(3) of Dodd-Frank (“if prescribed by applicable State or Federal law, each creditor shall pay interest to the consumer on the amount held in any . . . escrow account that is subject to this section in the manner as prescribed by that applicable State or Federal law”), which, according to the opinion, expresses Congress’ view that the type of law at issue does not “prevent or significantly interfere with a national bank’s operations.” Moreover, the panel disagreed with the national bank’s reliance on the OCC’s 2004 preemption regulation, which interpreted the standard more broadly, by concluding that the regulation had no effect on the preemption standard. This decision could have significant implications for the rise of preemption by federally chartered banks.

    Courts U.S. Supreme Court Appellate Ninth Circuit Mortgages Escrow Preemption National Bank Act Dodd-Frank OCC

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