Daily Development for Thursday, August 15, 2002


By: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri


MORTGAGES; INTEREST; FEDERAL PREEMPTION: Under the terms of the Home Owner's Loan Act, Congress intended to fully preempt state regulation of loan charges by "occupying the field."

Consequently, state law cannot affect the question of whether the lender is justified in collecting pre-closing interest for monies advanced by wire transfer into a closing.


Wash. Mut. Bank v. Superior Court, 115 Cal. Rptr. 2d 765 (2002)


Borrower alleged that a provision of California law prohibiting lenders from charging interest on funds before close of escrow restricted the lender practice of contracting for and collecting interest from the time that funds were wire transferred into escrow closing accounts, even where the closing was delayed.    The lender, a federally charter thrift institution, responded by saying that California law was wholly preempted by federal law making the contract enforceable except as specifically restricted by federal regulation.  The court here agreed.


The Home Owner's Loan Act was first enacted in 1933, as part of the New Deal.  It has gone through a number of permutations since then, of course, most notably as a consequence of the great savings and loan crisis of the late 1980's.  The Act gives to the federal government the right to regulate lending activities of federally chartered savings and loan associations.


In the famous De la Cuesta decision in 1982, the United States Supreme Court concluded that the Congress did give to the federal regulatory (at that time the Federal Home Loan Bank Board) the power to regulate preemptively private contracts that federally chartered lenders made with their borrowers.  The case, of course, involved due on sale clauses.  A few years later, other federal legislation extended the due on sale clause preemption to all lenders, and slowed down the rush of lenders abandoning state chartered status to shelter under the FHLBB's umbrella.


The five judge majority in De la Cuesta did not rule that the federal regulations on lending practices "occupied the field" and precluded any state law regulation in other areas.  It suggested, however, that the FHLBB could elect to so occupy the field if it so desired.  A sixth judge, Justice O'Connor, seemed to agree, insofar as lending practices were concerned, although she noted that the Congress likely had not preempted local tax laws or zoning laws or other manifestations of local control unrelated to lending agreements.  Justices Rhenquist and Stevens dissented.  (Powell took no part in the decision.)


In 1996, the federal regulators, now morphed into the Office of Thrift Supervision, elected to exercise the authority to occupy the field.  It adopted express language implementing the authority that the Supreme Court suggested that it had.  In 12 Code of Federal Regulations section

560.2, the OTS provided:



"(a) Occupation of field. ... To enhance safety and soundness and to enable federal savings associations to conduct their operations in accordance with best practices (by efficiently delivering low-cost credit to the public free from undue regulatory duplication and burden), OTS hereby occupies the entire field of lending regulation for federal . . .  savings associations. OTS intends to give federal savings associations maximum flexibility to exercise their lending powers in accordance with a uniform federal scheme of regulation. Accordingly, federal savings associations may extend credit as authorized under federal law, including this part, without regard to state laws purporting to regulate or otherwise affect their credit activities, except to the extent provide in paragraph (c) of this section or 560.110 of this part. For purposes of this section, 'state law' includes any state statute, regulation, ruling, order or judicial decision."


"(b) Illustrative examples. Except as provided in  560.110 of this part, the types of state laws preempted by paragraph (a) of this section include, without limitation, state laws purporting to impose regulations regarding:


"(1) Licensing, registration, filings, or reports by creditors; "

(2) The ability of a creditor to require or obtain private mortgage insurance, insurance for other collateral, or other credit enhancements; "

(3) Loan-to-value ratios; "

(4) The terms of credit, including amortization of loans and the deferral and capitalization of interest and adjustments to the interest rate, balance, payments due, or term to maturity of the loan, including the circumstances under which a loan may be called due and payable upon the passage of time or a specified event external to the loan; "

(5) Loan-related fees, including without limitation, initial charges, late charges, prepayment penalties, servicing fees, and overlimit fees; (6) Escrow accounts, impound accounts, and similar accounts; "

(7) Security property, including leaseholds; "

(8) Access to and use of credit reports; "

(9) Disclosure and advertising, including laws requiring specific statements, information, or other content to be included in credit application forms, credit solicitations, billing statements, credit contracts, or other credit-related documents and laws requiring creditors to supply copies of credit reports to borrowers or applicants; "

(10) Processing, origination, servicing, sale or purchasing of, or investment or participation in, mortgages; "

(11) Disbursements and repayments; "

(12) Usury and interest rate ceilings to the extent provided in 12 U.S.C. 1735f-7a and part 590 of this chapter and 12 U.S.C. 1463(g) and  560.110 of this part; and "(13) Due-on-sale clauses to the extent provided in 12 U.S.C.

1701j-3 and (part 591 of this chapter.


"(c) State laws that are not preempted. State laws of the following types are not preempted to the extent that they only incidentally affect the lending operations of Federal savings associations or are otherwise consistent with the purposes of paragraph (a) of this section.


"(1) Contract and commercial law; "

(2) Real property law; "

(3) Homestead laws specified in 12 U.S.C. 1462a(f); "

(4) Tort law; "

(5) Criminal law; and "

(6) Any other law that OTS, upon review, finds:


"(i) Furthers a vital state interest; and "

(ii) Either has only an incidental effect on lending operations or is not otherwise  contrary to the purposes expressed in paragraph (a) of this section."


That should certainly do the trick, insofar as little issues like when interest starts to accrue on wire-transferred funds.  The contract controls, and nothing that California law provides will have anything to do with it.



Comment 1: Professor Roger Bernhardt, discussing this case in the California Real Property Reporter, notes that California courts have refused to find comprehensive federal preemption with respect to certain other federal statutes - the Alternative Mortgage Transaction Parity Act, the Truth in Lending Act, and the Depository Institutions Deregulation and Monetary Control Act.(citing  Black v. Financial Freedom  Sr.

Funding Corp. 112 Cal. Rptr. 2d 445 (Cal. App. 2001) (the DIRT DD for

10/16/01).  He comments that there may be some period of uncertainty as to when federal law applies, "at least so long as the answers come to us from state rather than federal courts."


Comment 2:  Insofar as these other statutes are concerned, the editor concurs that not only state courts, but some federal courts, are likely to see areas of regulation left in the states.  These statutes come from a time when outright "occupy the field" preemption was not so fashionable. But the broad mandate of the Home Owner's Loan Act, as validated in De la Cuesta and implemented in these new regulations, likely will withstand scrutiny at every level.


MORTGAGES; INTEREST: Funds wired to escrow closing account are the "functional equivalent of cash" and fit within the "cash payment" exception to a California statute restricting the collection of interest before close of escrow.


Wash. Mut. Bank v. Superior Court, 115 Cal. Rptr. 2d 765 (2002) , discussed under the heading: "Mortgages; Interest; Federal Preemption."


The court held that, even if the practice were not protected by federal preemptive legislation, the wire transfer of monies into an account renders the money as available to the borrower as a cash payment would be, and consequently the "cash" exception to the prohibition of pre- closing interest would have applied.

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