Dodd-Frank may have changed the landscape of federal preemption of state laws regulating national banks and federal thrifts, but it does not apply retroactively. The old rules still prevail for loans originated prior to July 21, 2010, or so everyone assumes, but many courts have now confirmed it. That makes McCauley v. Home Loan Investment Bank, F.S.B. & Deutsche Bank National Trust Company, an opinion recently issued by the Fourth Circuit, an interesting development. The Fourth Circuit joined many others in holding that federal preemption bars claims against federal thrifts to the extent the claims would effectively regulate lending practices, but it held that traditional common law fraud claims are not preempted. Other courts have said as much, but the McCauley opinion leaves relatively little room for federal preemption when fraud is alleged compared to other circuits. 

In McCauley, The borrower alleged that the lender providing her with a refinance represented to her that her home was worth more than it actually was, though it appears the lender was simply referring to an appraisal figure given by a third party appraiser. Based on that appraisal, the borrower alleged she entered into an ARM that, post-adjustment, she could not afford.

The borrower alleged two theories of recovery: (1) that the loan was unconscionable under West Virginia law given its supposedly unfair terms; and (2) fraud in misrepresenting the value of the home.

First, the Fourth Circuit gave some needed circuit-level clarity to the issue of whether Dodd-Frank’s revisions to preemption rules in 2010 are retroactive. The Court explained that, "[b]ecause 12 C.F.R. § 560.2 was in effect when the loan contract was entered into, it governs here.”

Then proceeding to analyze preemption under the pre-Dodd-Frank framework, the Fourth Circuit easily reached the conclusion that the borrower’s unconscionability claims were preempted by federal law. No surprise there. Broadly speaking, HOLA and OTS implementing regulations preempt state laws regulating federal savings and loans and thrifts. The National Bank Act and OCC implementing regulations, with some nuanced differences, provide similar preemption of state laws regulating national banks. Thus, the court held the borrower’s challenge to an allegedly rushed closing “falls squarely within Ocean Bank’s “[p]rocessing, origination, servicing, sale or purchase of, or investment or participation in, mortgages.” The allegation that the inflated appraisal led to an unaffordable loan was effectively “an attempt to regulate ‘loan to value ratios,’ as well as ‘terms of credit,’ which are specifically covered by HOLA’s implementing regulation.” The borrower’s claims that the ARM led to too high of an interest rate were likewise preempted for the same reason.

Curiously, though, the Fourth Circuit held the borrower’s claims of a deceptively inflated appraisal were preempted as relating to “[d]isclosures and advertising” and “origination” only for purposes of the unconscionability claim. As to the fraud claim, the court held the borrower’s complaint was more in the nature of alleging, just in this particular case only, that the national bank made a false statement: the “complaint alleges an affirmative deception by the issuer of her mortgage, an act outside the scope of § 560.2(b))”. In reaching its conclusion, the court relied on an opinion letter from the OTS as to whether a state deceptive trade practices statute was preempted. The OTS said that claims narrowly targeted to combating a specific deception could survive federal preemption.

The Fourth Circuit’s ruling effectively creates a circuit split with other circuits. See, e.g., Silvas v. E*Trade Mortg. Corp., 514 F.3d 1001 (9th Cir. 2008) (claims alleging misrepresentations about loan terms preempted); In re Ocwen Loan Servicing, LLC Mortg. Servicing Litigation, 491 F.3d 638 , 647 (7th Cir. 2007) (failing to follow contract terms not preempted, but most other disclosure or term misrepresentations likely preempted, unless claim does not go “beyond common law fraud”). The root of the differing opinions appears to be what the fraud was about – generally speaking, a borrower’s allegation that the lender did not give enough information, or hid things in a misleading way, should be preempted because fraud claims of that nature effectively challenge “disclosure” requirements; such laws are expressly preempted by OTS. 12 C.F.R. § 560.2(b)(9). Only if the allegation is that a specific fact was affirmatively misrepresented should surviving preemption even be a possibility. In McCauley, the allegation sounded more like the former in that the alleged misrepresentation was the lender simply repeating the value found by the appraiser, without any specific representation that the lender thought it to be an accurate one.

Is a Supreme Court case on HOLA coming to sort this out? Maybe, since the circuit cases diverge, but it is still the case that pre-Dodd-Frank claims should be dying a natural death. The Supremes may not want to wade in. On the other hand, pre-Dodd-Frank claims will be with us for some time to come, and the Supreme Court has not recently opined on HOLA – the last major ruling was Fidelity Federal Sav. And Loan Ass’n v. de la Cuesta, 458 U.S. 141 (1982). Preemption issues were touched in the more recent Watters v. Wachovia Bank, N.A., 550 U.S. 1 (2007) case, but the issues primarily involved whether preemption applied equally to national bank subsidiaries, not the scope of preemption more generally.