Wednesday, September 23, 2020
By Sandra Hong Staff Writer
A California law requiring interest payments on residential mortgage escrow accounts is preempted by a 1933 federal loan act and regulations promulgated under it, the U.S. Ninth U.S. Circuit Court of Appeals held yesterday.
It reversed an order by District Judge Edward M. Chen of the Northern District of California denying a motion to dismiss a class action against JP Morgan Chase for not paying escrow interest on mortgages it acquired from Washington Mutual during the financial crisis in 2008. The plaintiffs relied on California Civil Code §2954.8(a) which requires the payment of “at least 2 percent simple interest per annum” on funds that are held in escrow.
Circuit Judge Ryan D. Nelson wrote the majority opinion in which Senior Circuit Judge J. Clifford Wallace joined. District Court Judge James S. Gwin of the Northern District of Ohio, sitting by designation, dissented.
In denying Chase’s motion to dismiss, Chen determined that the federal Home Owners’ Loan Act of 1933 (“HOLA”) applies only to conduct by federal savings associations, and not a national bank such as Chase. Since the plaintiffs’ claims arise out of Chase’s nonpayment of interest after it acquired their mortgage loans from federal savings association Washington Mutual, Chen said the federal preemption authorized under HOLA does not apply.
“It is not clear from either the language or legislative history of HOLA that Congress intended the Act’s preemptive effect to attach to a loan even after it is sold by a federal savings association,” Chen wrote, noting that Congress could not have contemplated loans being sold on a secondary market when HOLA was enacted in 1933.
However Nelson said Chen overlooked subsequent amendments to HOLA and regulations promulgated under it through the now-defunct Office of Thrift Supervision (“OTS”).
“Although a secondary market for mortgage loans did not exist at the time HOLA was adopted in 1933, Congress created [Fannie Mae] in 1938, thereby establishing a secondary market for loans,” Nelson wrote.
Congress further expanded the secondary market in 1970 with Freddie Mac, then amended HOLA in 1978 “to allow savings associations to sell loans into the secondary market,” Nelson added.
Nelson also determined that OTS, which was created under HOLA then later disbanded by the Dodd-Frank Act, was given “broad authority” to cover not only conduct by federal savings associations but to “occup[y] the entire field of lending regulation for federal savings associations.”
‘Plain Text’ Reading
Nelson highlighted specific language of §560.2(a) of HOLA, which provides “OTS is authorized to promulgate regulations that preempt state laws affecting the operations of federal savings associations when deemed appropriate” and “OTS intends to give federal savings association maximum flexibility to exercise their lending powers in accordance with a uniform federal scheme of regulation.”
“Applying the plain meaning of the OTS’s preemption regulation, we hold that field preemption principles extend to all state laws affecting a federal savings association, without reference to whether the conduct giving rise to a state law claim is that of a federal savings association or of a national bank.”
Chase argued that California’s interest-on-escrow law under Civil Code §2954.8 would adversely affect the marketability of “thrift loans” originated by federal savings associations on the secondary market, defeating HOLA’s intent of ensuring stability of such loans.
Nelson agreed, concluding that state requirements such as California’s would “impede the securitization of those loans” by creating uncertainty about applicable law governing the loans and imposing “substantial compliance costs” for secondary market buyers.
Dissenting, Gwin said the majority opinion was not supported by plain reading of HOLA or regulations promulgated through it.
“The majority recognizes the HOLA includes no statutory language extending preemption to banks but suggests we should find such intent from the 1978 HOLA legislation,” Gwin wrote.
“The 1978 HOLA legislation allowed the sale of federal savings association generated loans. The 1978 HOLA says nothing regarding the transferability of federal savings association state preemption.”
Moreover, Gwin said the majority opinion contradicted the court’s own 2018 holding in Lusnak v. Bank of America. Nelson concluded Lusnak’s holding was specific to conflict preemption and “says little about whether preemption applies under HOLA’s less onerous standard.”
“This Court’s Lusnak decision found that national banks must pay California’s escrow interest on loans that national banks themselves generated. Chase is a national bank with California escrow accounts. It seems obvious – Chase, a national bank and not a federal savings association, should comply with California’s escrow interest law.”
In Lusnak, Bank of America petitioned for certiorari to the U.S. Supreme Court, which was denied.
The case is McShannock v. JP Morgan Chase Bank, 19-15899.
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