Tuesday, February 1, 2005
State High Court Throws Out ‘Predatory Lending’ Ordinance
By DAVID WATSON, Staff Writer
An Oakland city ordinance purporting to regulate “predatory” mortgage lending practices is preempted by state law, the California Supreme Court ruled yesterday.
Writing for herself and three colleagues, Justice Janice Rogers Brown said the ordinance Oakland adopted in 2001, aimed at “subprime” lenders targeting home buyers who would not qualify for traditional loans, ran afoul of provisions of the state Financial Code signed into law eight days later. A similar ordinance was adopted by Los Angeles in 2003.
Chief Justice Ronald M. George dissented, joined by Justices Joyce Kennard and Carlos Moreno, arguing that it was unreasonable to find implied preemption where legislators had rebuffed efforts by banking groups to have express preemptive language included in the law.
The Oakland scheme defined “high cost” home loans and barred or limited prepayment penalties on such loans, and well as enacting other restrictions. The ordinance was challenged by the American Financial Services Association in Alameda Superior Court.
The trial court denied a preliminary injunction and Div. One of the First District Court of Appeal affirmed that ruling in September of 2003, declaring that the ordinance neither contradicted nor duplicated the state law and rejecting AFSA’s implied preemption argument.
But Brown said yesterday there were “clear indications” in the law “of the Legislature’s implicit intent to fully occupy the field of regulation of predatory lending tactics in home mortgages.”
The Financial Code, she observed, “comprehensively regulates predatory lending practices in home mortgages” and “delineates at length what mortgages are covered, what lending acts are prohibited, who can be held liable for violationsÖ, the various enforcement mechanisms available, who may invoke such enforcement mechanisms, and defenses to such violations.”
Regulation of mortgage lending has “historically occurred at the state, not the municipal, level,” Brown added.
“[T]he Ordinance is not supplementary legislation that in other contexts might be allowed, but a line item veto of those policy decisions by the Legislature with which the City disagrees. In revisiting this area fully occupied by state law, the Ordinance undermines the considered judgments and choices of the Legislature, and is therefore preempted.”
Even if Oakland were correct in its claim that unfair lending practices targeting home shoppers with credit problems are particularly prevalent within its borders, Brown argued, that would not justify the ordinance.
“Such an approach would mean that any city which claimed to experience a disproportionate number of foreclosures, or instances of securities fraud, could simply write its own measures regardless of any confusion these competing measures may foster,” she pointed out.
But George said the court’s majority was ignoring the history behind enactment of the state law. The passage of the legislation “hinged” on the decision not to include a preemption provision, the chief justice contended.
“Unlike our previous implied preemption cases, this is not simply a case in which the Legislature was silent about preemption,” he wrote. “Here, there is considerable extrinsic evidence, and a concession from the party arguing in favor of preemption, that the Legislature specifically considered and purposefully rejected an express preemption clause despite extensive lobbying for the inclusion of express preemption language in the state statute. As plaintiff American Financial Services Association—itself acknowledges, there were strongly held disagreements over preemption between industry representatives and consumer proponents of the bill. Indeed, the record reveals that the subprime lending industry vigorously lobbied for express preemption language.”
The “principal rule” in the law of governing preemption “is that legislative intent be clearly indicated,” George said, adding:
“A legislative stalemate on preemption is not an indication of a clear intent to preempt local legislation.”
Brown conceded that the subject of preemption had been raised with legislators, but said the decision to include a preemption provision should not be treated as dispositive.
“Of course, by definition, the Legislature’s implicit full occupation of a field occurs only when there is no express intent in the state law,” she commented. “We disagree with the Court of Appeal’s statement that ëwhen the Legislature is silent on preemption, courts presume there is no intent to preempt.’ Adopting this approach would be a notable departure from our implied preemption precedents. Instead, in such circumstances we consider factors including the language and scope of the adopted measure, the history behind the adopted measure, and the history of regulation in the area, as we have done in this and other field preemption cases.”
The case is American Financial Services Association v. Oakland, 05 S.O.S. 459.
Copyright 2005, Metropolitan News Company