Opinion
Case No. 01 C 3935
February 11, 2001
ORDER
Plaintiff' Thomas McCarthy has filed suit against defendants Option One Mortgage Corp. ("Option One") and BNC Mortgage, Inc. ("BNC") for alleged violations of the Illinois Interest. Act, 815 ILCS 205/4 et seq. Defendants have filed a motion to dismiss pursuant to Federal Rule of Civil Procedure 12(b)(6), arguing that McCarthy's claim is preempted by the Alternative Mortgage Transaction Parity Act, 12 U.S.C. § 3801 et seq. (Parity Act"). For the reasons set forth below, defendants' motion is denied.
McCarthy alleges that he executed a loan with defendant BNC on February 18, 2000. The loan consisted of an amount financed of $142,289.89, a finance charge of $400,943.71, and an annual percentage rate ("APR") of 12.152%. BNC later assigned the loan to defendant Option One. McCarthy paid off the loan in March 2001 and was assessed a prepayment penalty of $6,276.39, pursuant to the parties' agreement. McCarthy claims that the prepayment penalty was in direct violation of the Illinois Interest Act, which prohibits such penalties for loans with an APR that exceeds 8%.
"Whenever the rate of interest exceeds 8% per annum on any written contract, agreement or bond for deed providing for the installment purchase of residential real estate, or on any loan secured by a mortgage on residential real estate, it shall be unlawful to provide for a prepayment penalty or other charge for prepayment." 815 ILCS 205/4(2)(a).
Defendants claim that the Illinois Interest Act is preempted by the federal Parity Act. Specifically. defendants argue that the Parity Act explicitly preempts state laws that prohibit prepayment penalties. In addition, defendants claim that before executing the loan, McCarthy read and signed a disclosure statement that explicitly provided that BNC had the right to preempt state law with regard to prepayment penalties. McCarthy argues that the Illinois Interest Act is not preempted by federal law in this case because defendants failed to comply with specific federal regulations, a prerequisite to preemption.
The Parity Act applies to banks, credit unions, and all other housing creditors, including defendants. 12 U.S.C. § 3803 (a)(3). The purpose of the act was to "authorize non-federally chartered housing creditors to take advantage of the federal regulations for alternative mortgage-gape transactions that govern federally chartered lending institutions." Nat'l Home equity Mortgage Ass'n v. Face, 239 F.3d 633, 637 (4th Cir.), cert. denied, 122 S.Ct. 58 (2001). Thus, the act expressly preempts state laws that prohibit alternative mortgage transactions ("AMTs"). "An alternative mortgage transaction may be made by a housing creditor in accordance with this section, notwithstanding any State constitution, law or regulation" 12 U.S.C. § 3803(c). However, in order to trigger preemption, state housing creditors must comply with regulations governing federal savings and loan associations, promulgated by the Office of "Thrift Supervision ("OTS"). 12 U.S.C. § 3803(a)(3). In 1996, the OTS adopted a regulation that "clarified that state housing creditors, like their federal counterparts, were authorized to charge prepayment penalties and made clear that this regulation preempted contrary state laws." Shinn v. Encore Mortgage Servs., Inc., 96 F. Supp.2d 419, 423 (D.N.J. 2000) (citing 12 C.F.R. § 560.220).
The term "alternative mortgage transaction" is defined by the Parity Act as a residential mortgage loan:
(A) in which the interest rate or finance charge may be adjusted or renegotiated;
(B) involving a fixed-rate, but which implicitly permits rate adjustments by having the debt mature at the end of an interval shorter than the term of the amortization schedule; or
(C) involving any similar type of rate, method of determining return, term, repayment, or other variation not common to traditional fixed-rate, fixed-term transactions, including without limitation, transactions that involve the sharing of equity or appreciation; described and defined by applicable regulation.12 U.S.C. § 3802 (1).
Under the Supremacy Clause, U.S. Const. Art. VI. cl. 2, federal law preempts state law "either by express provision, by implication, or by a conflict between federal and state law) New York State Conference of Blue Cross Blue Shield Plans v. Travelers Ins. Co., 514 U.S. 645 (1995). In addition, "a federal agency acting within the scope of its congressionally delegated authority may pre-empt state regulation." Louisiana Public Serv. Comm'n v. F.C.C., 476 U.S. 355, 369 (1986). The Supreme Court recognizes that a federal regulation preempts conflicting state law where the agency (1) intended to preempt state law and (2) acted within the scope of its authority. Fidelity Fed. Sav. Loan Ass'n v. de la Cuesta, 458 U.S. 141 , 153-55 (1982).
Courts in other circuits have found that the OTS intended to "preempt state laws which limit state creditors' ability to charge prepayment penalties in connection with AMfs" Shinn, 96 F. Supp.2d at 493; see also Nat'l Home Equity Mortgage Ass'n 939 F.3d at 638-39. Those same courts have found that the OTS acted within the scope of its authority in declaring its intention. Id. at 423-25; Nat'l Home Equity Mortgage Ass'n, 239 F.3d at 640. Therefore, "the Parity Act and the regulations, to which it explicitly refers, provide that when a non-federally chattered housing creditor elects to be governed by federal law and complies with that law, it may charge a contractually specified prepayment fee as authorized by federal law, despite the fact that state law] provides otherwise." Nat'l Home Equity Mortgage Ass'n, 239 F.3d at 639. This court agrees with those holdings. Indeed, McCarthy has not disputed the Parity Acts preemptive authority in Illinois. McCarthy also has not disputed defendants claims that BNC qualifies as a "housing creditor" as defined by the Parity Act and that McCarthy entered into an "adjustable rate mortgage" as defined by the act.
McCarthy's only response to defendants' claims of preemption is that defendants have not met the Parity Act's requirement that lenders comply with all OTS regulations in order to effectuate preemption. 12 U.S.C. § 3803 (a)(3). Specifically. he claims that defendants have failed to comply with the OTS's disclosure requirements set forth in 12 C.F.R. § 226.19(b)(1). That regulation provides that at the time of a transaction creditor's must provide to the borrower "[t]he booklet titled Consumer Handbook on Adjustable Rate Mortgages published by the Board and the Federal Home Loan Bank Board, or a suitable substitute." 12 C.F.R. § 226.19(b)(1). McCarthy claims that defendants failed to provide him with either the Consumer Handbook on Adjustable Rate Mortgages ("Handbook") or a suitable substitute.
Defendants have not specifically disputed McCarthy's claim that he never received the Handbook. Rather, defendant Option One argues that McCarthy foiled to make this claim in his complaint and that he may not raise it for the first time in a response to a motion to dismiss. In other words. Option One argues that this court must simply ignore McCarthy's claim that he never received the Handbook. The court disagrees. The Supreme Court has noted that "we have never assumed lightly that Congress has derogated state regulation, but instead have addressed claims of pre-emption with the starting presumption that Congress does not intend to supplant state law. New York State Conference of Blue Cross Blue Shield Plans v. Travelers Ins. Co., 514 U.S. 645, 654 (1995) (emphasis added). Thus, it is not McCarhy's burden to allege in his complaint that the state law on which he relies has not been preempted by federal law. Rather, it is defendants' burden to show that the Illinois Interest Act is preempted by federal law. See Harris Trust v. Salomon Brothers, Inc., No. 92-5883. 1997 WL 619860, at *2 (N.D. Ill. Sept. 30. 1997) (on ERISA claim, "defendants bear a considerable burden to overcome the starting presumption against preemption").
Option One also indicates in its reply memorandum that it was not subject to the disclosure requirements because it is not a "creditor" as defined by the regulations. However, the critical issue for preemption is whether BNC, as the creditor while executing the loan with McCarthy, satisfied the disclosure requirements.
Based on the current record, the court is unable to conclude that the Parity Act preempts the Illinois Interest Act in this case. In Shinn, 96 F. Supp.2d at 426, the court found preemption on the defendants motion to dismiss, but only after noting that there was no dispute that the defendants had complied with the applicable OTS regulations. In this case, there is a clear dispute as to whether defendants complied with those regulations. The defendants might still prevail on this issue on summary judgment, but only if they provide the court with enough evidence to establish that they have, in fact, complied with the necessary OTS regulations in order to effectuate the Parity Act's preemption of the Illinois Interest Act. Defendants might
prove that they indeed provided the Handbook to McCarthy or they might show that. the disclosure statement signed by McCarthy (or some other unmentioned disclosure to him) constitutes a "suitable substitute" for the Handbook. Cf. Chrysler First Fin. Serv. Corp. v. Revells, No. 91L-06-12, 1993 WL 542031, at. *9 (Del.Super.Ct. Nov. 17, 1993) (finding a factual dispute as to whether lender had provided a suitable substitute to the Handbook where the defendant's agent verbally explained the loan to the plaintiff's). Until then, however, there is an insufficient basis for a holding that the Illinois act is preempted. Defendants' motion to dismiss must be denied.