Home Owners’ Loan Act (HOLA) Preempted Class Action Claims Premised on Scheme to Defraud Senior Citizens into Entering into Reverse Mortgages but Plaintiff given Leave to File Amended Class Action Complaint California Federal Court Holds
Plaintiff filed a putative class action against Financial Freedom Senior Funding Corporation alleging that “Financial Freedom instituted a complex scheme to defraud senior citizens in the structuring, origination, underwriting, marketing and sale of reverse mortgages.” Munoz v. Financial Freedom Senior Funding Corp., 567 F.Supp.2d 1156, 1158 (C.D. Cal. 2008). The class action complaint alleged ten claims for relief: elder abuse, violation of California’s Unfair Competition Law (UCL) practices by violating the Real Estate Settlement Procedures Act (RESPA) and Regulation X, false advertising, breach of fiduciary duty and aiding and abetting breach of fiduciary duty, fraudulent concealment, unjust enrichment and imposition of constructive trust, violation of the Consumer Legal Remedies Act (CLRA), breach of the implied covenant of good faith and fair dealing, and negligent misrepresentation. Id., at 1161. At bottom, the class action alleged that defendant “included a number of hidden costs and fees in the reverse mortgage transactions, and also to have paid brokers ‘kickbacks’ for directing borrowers to the company.” Id., at 1158. Defense attorneys moved the district court for judgment on the pleadings as to the class action claims under Rule 12(c) on the ground that the class action claims are preempted by federal law. Id., at 1159. The district court granted the motion in part and denied it in part.
The district court summarized the three ways in which federal law may preempt state law, and noted that while there is generally a presumption against federal presumption, that presumption does not apply to the banking industry because it is “‘an area where there has been a history of significant federal presence.’” Munoz, at 1159 (citation omitted). Defense attorneys argued that the class action claims were preempted by the Home Owners’ Loan Act of 1933 (HOLA), which gave “broad authority” to the Office of Thrift Supervision (OTS) to “promulgate regulations governing savings and loan institutions,” id., at 1160. The OTS regulations, in turn, expressly provide, “OTS hereby occupies the entire field of lending regulation for federal savings associations.” Id. (quoting 12 C.F.R. § 560.2(a)). Under Ninth Circuit authority, “HOLA preempts all state regulation of savings associations under the doctrine of field preemption.” Id. (citations omitted). Specifically, HOLA expressly preempts state laws governing “Loan-related fees, including without limitation, initial charges, late charges, prepayment penalties, servicing fees, and over limit fees,” § 560.2(b)(5), and “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,” § 560.2(b)(9).
The district court turned to whether any of the class action claims were preempted by HOLA. Munoz, at 1161-62. Defense attorneys argued that all of the class action claims “concentrate[d] on the fees and costs associated with reverse mortgages and the advertising and disclosures related to the transaction” and so were preempted by HOLA, id., at 1162. Plaintiff countered that (1) “laws of general applicability like CLRA and California’s [UCL] are not preempted by HOLA,” and (2) that her class action claims arise from “a federal regulation barring undisclosed kickbacks between lenders and brokers,” and so they are not preempted by HOLA. Id. The district court rejected plaintiff’s first argument, explaining that under Ninth Circuit authority no “law of general applicability” exception applies to HOLA preemption. Id., at 1162-63. The district court then held that the class action “raises a number of claims related to the fees, commissions, penalties and costs associated with the reverse mortgage transaction” and that those claims fall squarely within the scope of HOLA preemption. Id., at 1163. Accordingly, “[t]o the extent [plaintiff] seeks to apply the UCL to ‘loan-related fees,’ her claims are preempted by HOLA.” Id. (citation omitted). Similarly, class action claims alleging false advertisement and RESPA violations against defendant also were preempted, id.
The district court concluded, however, that it could not dismiss the class action complaint in its entirety “because it is unclear whether [plaintiff] has any claims against Financial Freedom that do not rely on ‘loan-related fees’ or ‘advertising and disclosures.’” Munoz, at 1165. Accordingly, the court granted plaintiff leave to amend the class action complaint in an effort to see whether any of the class action claims “can stand on their own in the absence of fee and disclosure-related allegations,” id.