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From Banking and Finance Law Daily, September 6, 2013

Federal law preempted Massachusetts law application to mortgage funded by federal thrift

By Richard A. Roth, J.D.

A Massachusetts law giving special protections to a consumer who applied for a high-cost mortgage loan was preempted by the Home Owners Loan Act (HOLA), regardless of an exemption preserving some Massachusetts laws from preemption by the Truth in Lending Act (TILA), a U.S. District Judge for the District of Massachusetts has determined. The TILA exemption did not apply because the loan was table-funded by a federally chartered institution, the judge said (Thomas v. CitiMortgage, Inc., Sept. 5, 2013, Saylor, U.S. District Judge).

The consumer sued her current creditor, the mortgage loan broker, and the federal savings association that acquired the loan from the broker, claiming that the mortgage was invalid because the broker and savings association had not complied with Massachusetts law disclosure and other requirements. The companies asserted that HOLA and implementing Office of Thrift Supervision regulations preempted the state law because the federal savings association was the original lender.

The ordinary preemption analysis was complicated because the Federal Reserve Board in 1982 used its authority under 15 U.S.C. §1633 to grant an exemption from preemption that covered the state law relied on by the consumer. As quoted by the court, the exemption says that:

[C]redit transactions that are subject to chapter 140D (Consumer Credit Costs Disclosures) of the General Laws of Massachusetts, established by chapter 733 of the Acts of 1981, and its implementing regulations are exempt from chapter 2 (credit transactions) and chapter 4 (credit billing) of the federal Truth in Lending Act. This exemption does not apply to transactions in which a federally chartered institution is a creditor. (72 FR 42171, Sept. 24, 1982)

The consumer conceded that if HOLA applied the state law would be preempted, the court noted. However, she asserted that applying HOLA would not carry out TILA’s intent to allow states to seek exemptions that would allow them to apply their own consumer protection laws free of preemption by federal law.

Ordinarily, a case such as this would be decided simply on whether HOLA preempted the state disclosure law. However, due to the effects of the TILA exemption, the court said it was necessary to consider three questions:

  • Does federal law preempt the application of the state law to loans made by federal savings associations?
  • If so, does the preemption extend to loans that were table-funded by thrifts, as opposed to loans originated in a thrift’s own name?
  • If so, was this consumer’s loan table-funded?

Preemption. HOLA gave the OTS broad authority to adopt regulations that preempted the application of state laws and rules to federal thrifts, the court first said. The agency exercised that authority in a regulation saying that the “OTS hereby occupies the entire field of lending regulation for federal savings associations” (12 C.F.R. §560.2). The regulation provides a list of examples of state laws that are preempted and a list of types of state laws that are not preempted.

A state law covered by the list of preempted laws will be found to be preempted, the court said. A state law not covered by the list of examples still will be found to be preempted if it affects lending, unless it is covered by the list of laws that are not preempted.

The Massachusetts law in question was covered by two examples on the preemption list, the court said—laws addressing loan-related fees and laws addressing loan disclosures. Thus, if HOLA applied, the state law clearly would be preempted.

The consumer asserted, though, that the only way to give effect to Congress’ intent to allow state laws to be exempted from TILA was to also determine that there was no preemption by HOLA. The specific TILA exemption provision should displace the more general HOLA preemption provision, she argued.

The problem with the consumer’s argument, the court said, was that the TILA exemption granted by the Fed said explicitly that “transactions in which a federally chartered institution is a creditor” were not exempt from preemption.

Thus, it was necessary to decide whether the federal savings association was the consumer’s original lender, the court said. If the thrift were the original lender, then it would have been the creditor described in the TILA exemption. HOLA would apply and preempt the state law, the court reasoned.

Effect of table-funding. The loan was closed in the broker’s name and then assigned on the same day to the thrift, the court noted. The creditor, broker and thrift claimed that even though the loan was closed in the broker’s name, it was table-funded by the thrift, making the thrift the creditor.

Table-funding means that a loan is funded by an advance of funds to the broker and a contemporaneous assignment of the loan by the broker to the person who provided the funds. While there was no precedent on the relationship between table-funding and HOLA preemption, the court said, it made sense to treat a thrift that table-funded a loan as being the original lender. The thrift was the lender in everything except name, the court observed, and treating table-funding as lending was consistent with allowing federal thrifts to make loans without regard to state laws.

That interpretation was consistent with regulatory agency interpretations in other contexts, the court also noted.

If the thrift had table-funded the loan it would have been the original lender, the court said, and HOLA would preempt the Massachusetts law. So, did the thrift table-fund the loan?

Thrift as lender. Whether a loan was table-funded or not was best determined by referring to the definition in the Department of Housing and Urban Development Real Estate Settlement Procedures Act regulations at 24 C.F.R. 3500.2, the court said. The concerns of that regulation were who funded the loan and who had the real interest in the loan.

The facts showed that the thrift had table-funded the loan, the court concluded. The thrift approved the consumer’s application, issued a rate-lock letter, and imposed conditions the consumer had to satisfy to receive the loan; the loan was assigned to the thrift on the day of the closing; the consumer’s first payment was made to the thrift; and the thrift wired funds directly to a previous lender to pay off an earlier mortgage. The consumer had provided no evidence that the broker advanced any funds, the court added.

Conclusion. According to the court’s analysis, HOLA preempted the Massachusetts law if the loan had been made by the thrift; the loan would have been made by the thrift if the thrift had table-funded the loan; and the thrift had indeed table-funded the loan. As a result, the state law was preempted.

The case is No. 12-40122-FDS.

Attorneys: Laird J. Heal (Laird James Heal) for Kathleen A. Thomas. Gregory N. Blasé (K & L Gates LLP – MA) for CitiMortgage, Inc. Donn A. Randall (Bulkley Richardson & Gelinas) for Flagstar Bank, FSB. David P. Mason (Ogletree Deakins Nash Smoak & Stewart) for Allied Mortgage Capital Corporation.

Companies: Allied Mortgage Capital Corporation; CitiMortgage, Inc.; Flagstar Bank, FSB

LitigationEnforcement: ConsumerCredit Loans Mortgages Preemption TruthInLending MassachusettsNews

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