Daily Development for Monday,
by: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri
Today’s DD was reported by Howard Lax.
MORTGAGE BROKERS; REFINANCING; FEES: Mortgage broker is not a “creditor” within meaning of federal preemptive usury statute, and therefore broker is subject to state law limit on loan fees.
Sweeney v. Savings First Mortgage https://e2k.exchange.umkc.edu/exchweb/bin/redir.asp?URL=http://www.courts.state.md.us/opinions/coa/2005/148a04.pdf 2005 WL 1866071 (Md. 8/9/05).
Borrower challenged a mortgage broker's fee for a refinance loan. Maryland allows a mortgage broker to charge a fee only on the increase in loan amount for a loan that refinances a loan made in the prior year.
The mortgage broker argued that Section 501 of DIDMCA (12 USC 1735f-7a) preempted all state law limits on interest and finance charges.
The court first held that DIDMCA does preempt generally state regulation of loan fees, and not just interest. It also held that the Maryland statute in question was not the sort of comprehensive borrower protection statute to which DIDMCA, by its terms, would not apply.
Nevertheless, the court concluded that DIDMCA did not preempt state law in this case because a mortgage broker is not a “creditor” qualified for protection from state regulation. The Court agreed that state laws limiting lender fees could not be enforced against a "creditor ,"but DIDMCA did not protect mortgage brokers since they are no longer considered to be "creditors" under TILA. The Court stated:
“One thing is certain, mortgage brokers are not included in the definition of "creditor" under the TILA. A 1982 amendment to the TILA narrowed the definition of "creditor." At that time, a "person who regularly arranged for the extension of consumer credit" was removed from the definition of "creditor." Garn-St Germain Depository Institutions Act of 1982, Pub. L. No. 97-320, § 702(a), 96 Stat. 1469, 1538 (1982). Prior to the 1982 amendment, the definition easily would have been read to include mortgage brokers as creditors, thus eliminating the question presented in the case before this Court. By removing language from the definition of "creditor" that could include mortgage brokers, we find that Congress intended to eliminate those entities from the definition.. . . .”
“. . . We also believe the proper interpretation of the DIDMCA's preemption provision is to offer immunity from state regulation to lenders in order to promote a national housing policy, not to offer the same protections to any party to a transaction to which a qualified lender is also party. Therefore, Maryland's Finder's Fee Law is not preempted expressly by federal statute on the basis that a mortgage broker is a lender or creditor within the meaning of that statute.”
Reporter’s Comment: This decision may lead other states to limit the amount of fees that mortgage brokers can demand, just as many states are now limiting the amount of fees that payday advance companies can charge for their services. New state laws may not be the answer to protecting consumers from excessive mortgage broker fees, since most mortgage brokers receive the bulk of their compensation from the lender in the form of a yield spread premium. States still need to rely on self regulation by investors to prevent gouging by mortgage brokers.
Editor’s Comment 1: Although this case deals only with loan fees, note that it also lifts the preemptive protection from usury regulation under state law. Since DIDMCA, there hasn’t been much concern about these laws, and they have more or less been left alone in many states because of political or structural obstacles to changing them (some are embedded in the state Constitution.)
Some of these state statutes have relatively high fixed limits, and, in this low interest lending period, such statutes will cause little difficulty. But many statutes were amended about twenty years ago to set lending limits based upon some sort of index, and in many cases the index is not one that fits well with indeces used commonly by home mortgage lenders.
Furthermore, where lenders make an adjustable rate loan, there is always the question of whether movement of the interest rate pursuant to the adjustable rate feature will lead to a violation of the usury laws even though the original loan terms did not. The editor discussed this issue twenty years ago, but the rise of mortgage brokers and the fact that they do not enjoy preemptive protection may suddenly make his ancient article very timely. See Patrick Randolph, Home Finance in the Shadow World: Unsolved Missouri Usury Problems Affecting Adjustable Rate and Wraparound Loans, 31 UMKC L.R. 41 (1983). Note that the assumption that the author makes in the article that only a small range of loans will be affected by his comments is altered by the developments in the case reported today.
Editor’s Comment 2: This clear interpretation of the meaning of the amendments to TILA may have some ancillary benefits for lenders. A number of statutes restricting the behavior of lenders use the TILA definition. For instance, the last time the editor looked, the Equal Credit Opportuity Act - a particularly thorny maze for lenders, relied upon the TILA definition for its coverage. But be sure to check to ascertain whether the scope of coverage under this Act has also been amended.
The Reporter for this item was Howard Lax of the Michigan Bar.
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