A federal trial court in Massachusetts recently ruled that the Home Owners’ Loan Act (HOLA), the federal law that provides for the chartering, regulation and supervision of federal savings banks and other savings associations, preempts a Massachusetts law that limits the amount of insurance a borrower may be required to purchase to insure a home in connection with a home mortgage loan. The September 21 decision by the federal court came in a class action suit brought against a federal savings bank by Massachusetts home mortgage loan borrowers. The federal savings bank’s loan agreement required the home mortgage loan borrowers to maintain insurance on the mortgaged properties in an amount equal to the outstanding principal balance of the home mortgage loan. However, Chapter 183, Section 66 of the General Laws of Massachusetts prohibits lenders in Massachusetts from requiring borrowers to purchase insurance in an amount greater than the replacement cost of buildings on the mortgaged property. In finding that the Massachusetts law is preempted by HOLA, the federal court relied on the analytical framework set forth in former Office of Thrift Supervision (OTS) regulations that provide an illustrative list of types of state laws that are presumptively preempted, which includes any state law that limits a lender’s ability to require “private mortgage insurance, insurance for other collateral, or other credit enhancements.”
Nutter Notes: Under the Dodd-Frank Act, federal savings banks are now subject to the same preemption standards that apply to national banks, which is a conflict preemption standard rather than an occupation of the field standard. However, the Dodd-Frank Act preemption standards became effective for federal savings banks on July 21, 2011, after the activities subject to the class action case took place. As a result, the court applied the broader occupation of the field preemption standards set forth under the OTS’s old regulations implementing HOLA in this case. The OCC issued a final rule implementing the preemption provisions of the Dodd-Frank Act in 2011 that largely preserved the OCC’s approach to the preemption of state laws under prior rules. The Dodd-Frank Act precludes preemption of state law for national bank and federal savings bank subsidiaries, agents and affiliates. It also codifies the legal standard for preemption set forth in a 1996 U.S. Supreme Court decision. The final OCC rule also revised the OCC’s visitorial powers rule to recognize the ability of state attorneys general to enforce applicable state laws against national banks and federal savings banks as authorized by such laws.