McCauley v. Home Loan Inv. Bank

710 F.3d 551

Charlotte M. McCAULEY, Plaintiff–Appellant,

v. HOME LOAN INVESTMENT BANK, F.S.B.; Deutsche Bank National Trust Company, Defendants–Appellees.National Association of Consumer Advocates; National Consumer Law Center; Public Citizen, Amici Supporting Appellant.

No. 12–1181.

United States Court of Appeals, Fourth Circuit.

Argued: Jan. 31, 2013.

Decided: March 25, 2013.

ARGUED:Bren Joseph Pomponio, Mountain State Justice, Charleston, West Virginia, for Appellant. R. Terrance Rodgers, Kay Casto & Chaney PLLC, Charleston, West Virginia, for Appellees. ON BRIEF:Daniel F. Hedges, Mountain State Justice, Charleston, West Virginia, for Appellant. John W. Barrett, Patricia M. Kipnis, Bailey & Glasser LLP, Charleston, West Virginia, for Amici Supporting Appellant.

Before DUNCAN, WYNN, and FLOYD, Circuit Judges.

Affirmed in part, reversed in part, and remanded by published opinion. Judge DUNCAN wrote the opinion, in which Judge WYNN and Judge FLOYD joined.

OPINION

DUNCAN, Circuit Judge:

This appeal arises from the district court's dismissal of Charlotte McCauley's complaint against Home Loan Investment Bank, F.S.B. (“Home Loan”) and Deutsche Bank National Trust Company (“Deutsche Bank”), alleging state law claims based on a mortgage contract. The district court determined that McCauley's claims were preempted by the Home Owners' Loan Act (“HOLA”), 12 U.S.C. § 1461 et seq., and its implementing regulation, 12 C.F.R. § 560.2. For the reasons that follow, we affirm in part, reverse in part, and remand for further proceedings consistent with this opinion.

I.

A.

McCauley purchased her West Virginia home in 2001 on a land installment contract. In the late summer or fall of 2006, she contacted Ocean Bank, F.S.B. (“Ocean Bank”) to obtain financing to pay off her land contract. Ocean Bank sent an appraiser to McCauley's home. According to McCauley, the appraisal falsely represented that the home had a market value of $51,000 or more, when it was actually worth only approximately $35,700. Ocean Bank offered McCauley a loan of $51,000. McCauley alleges that the closing was rushed, and that she received insufficient explanation of the loan documents. Although her initial interest rate was 9.49 percent, the loan was an “exploding” adjustable rate mortgage (“ARM”). As such, the interest rate could adjust up to 15.49 percent, but could not adjust below the initial rate. McCauley struggled with her loan payments and ultimately declared bankruptcy in 2010.

B.

McCauley filed a complaint against Home Loan, the successor in interest to Ocean Bank, and Deutsche Bank, the current holder of the loan, in West Virginia state court alleging two claims under state law: unconscionability (“Count I”) and fraud (“Count II”). Count I alleged that the mortgage contract was unconscionable because the closing was hurried and conducted with inadequate explanation, the loan was induced by an inflated appraisal, and the loan's terms were substantively unfair. Count II alleged that Ocean Bank misrepresented the market value of McCauley's property for the purpose of inducing her into the mortgage contract, that McCauley reasonably relied on that representation, and that she was harmed by it.

Home Loan and Deutsche Bank removed the case to district court on diversity grounds and moved to dismiss the complaint. The district court dismissed each of McCauley's claims on the grounds that they were preempted by HOLA and its implementing regulation, 12 C.F.R. § 560.2. This appeal followed.

II.

On appeal, McCauley argues that neither her unconscionability claim nor her fraud claim are preempted by federal law.¹ In the alternative, she contends that HOLA's implementing regulation does not apply to her case, because it was vacated by the Dodd–Frank Wall Street Reform and Consumer Protection Act, Pub.L. No. 11–203, 124 Stat. 1376 (2010) (the “Dodd–Frank Act”). Home Loan and Deutsche Bank contend that the district court's preemption decisions were correct, or alternatively, that McCauley failed to state a claim upon which relief could be granted.

We review the district court's grant of a motion to dismiss de novo, focusing only on the legal sufficiency of the complaint. Giarratano v. Johnson, 521 F.3d 298, 302 (4th Cir.2008). We “take the facts in the light most favorable to the plaintiff,” but “we need not accept the legal conclusions drawn from the facts.” Eastern Shore Mkts., Inc. v. J.D. Assocs. Ltd. P'ship, 213 F.3d 175, 180 (4th Cir.2000).

A.

The primary question presented by this appeal is whether HOLA and its implementing regulation preempt McCauley's claims. A discussion of HOLA's preemption framework will aid our consideration of that issue.

Congress enacted HOLA during the depths of the Great Depression with the purpose of “restor[ing] public confidence by creating a nationwide system of federal savings and loan associations to be centrally regulated according to nationwide ‘best practices.’ ” Silvas v. E*Trade Mortg. Corp., 514 F.3d 1001, 1004 (9th Cir.2008) (quoting Fid. Fed. Sav. & Loan Ass'n v. de la Cuesta, 458 U.S. 141, 161, 102 S.Ct. 3014, 73 L.Ed.2d 664 (1982)). HOLA granted the Office of Thrift Supervision (“OTS”) the authority to regulate savings banks.² While HOLA itself does not delineate its preemptive effect, the implementing regulation promulgated by OTS is clear: it explains that the agency “occupies the entire field of lending regulation for federal savings associations.” 12 C.F.R. § 560.2(a).

Ordinarily, there is a presumption against preemption over state police powers. This presumption does not, however, apply in areas that have a history of significant federal presence, such as national banking. United States v. Locke, 529 U.S. 89, 108, 120 S.Ct. 1135, 146 L.Ed.2d 69 (2000). Of further import here is that a federal regulation has the same preemptive effect as a federal statute. de la Cuesta, 458 U.S. at 153, 102 S.Ct. 3014. Moreover, OTS itself instructs that “[a]ny doubt should be resolved in favor of preemption,” Lending & Investment, 61 Fed. Reg. 50951–01, 50966–67 (Sept. 30, 1996), and we are to defer to the agency's interpretation of its own regulation, see Auer v. Robbins, 519 U.S. 452, 461, 117 S.Ct. 905, 137 L.Ed.2d 79 (1997).

HOLA's implementing regulation provides that “federal savings associations may extend credit as authorized under federal law ... without regard to state laws purporting to regulate or otherwise affect their credit activities....” 12 C.F.R. § 560.2(a). Paragraph (b) of the regulation specifies, “without limitation,” the aspects of loans that states are preempted from regulating by paragraph (a):

(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;

...

(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; [and]

(10) Processing, origination, servicing, sale or purchase of, or investment or participation in, mortgages[.]

Id. at § 560.2(b). Finally, under paragraph (c) of the implementing regulation, certain state laws—including contract and tort law—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.” Id. at § 560.2(c).

OTS has outlined the steps a court should take in determining whether preemption applies:

When analyzing the status of state laws under § 560.2, the first step will be to determine whether the type of law in question is listed in paragraph (b). If so, the analysis will end there; the law is pre-empted. If the law is not covered by paragraph (b), the next question is whether the law affects lending. If it does, then, in accordance with paragraph (a), the presumption arises that the law is preempted. This presumption can be reversed only if the law can clearly be shown to fit within the confines of paragraph (c). For these purposes, paragraph (c) is intended to be interpreted narrowly. Any doubt should be resolved in favor of preemption.

Lending & Investment, 61 Fed. Reg. at 50966–67. When interpreting HOLA and its implementing regulation, however, we are cautioned that they are not intended to “preempt state laws that establish the basic norms that undergird commercial transactions.” OTS Op. Letter, Preemption of State Laws Applicable to Credit Card Transactions, 1996 WL 767462, at *5 (Dec. 24, 1996).

In light of these parameters, we turn to a consideration of McCauley's claims. We first address the question of whether her unconscionability claim is preempted and then turn to her fraud claim.

1.

As we have noted, in Count I of her complaint, McCauley contends the mortgage contract was unconscionable. She alleges that it was “closed in a hurried manner, without adequate explanation” and “induced by an inflated appraisal.” J.A. 100–01. She further alleges that the loan was substantively unfair, because, among other problems, she was unaware that it exceeded the market value of her home. Id. at 101.³

The district court analyzed each aspect of the alleged unconscionability—the hurried closing, the inducement by inflated appraisal, the disparity between the size of the loan and the value of the home, and the “exploding” ARM—separately, ultimately finding that each was of the nature of the laws covered by § 560.2(b). McCauley contends that this approach was improper. A finding of unconscionability often depends on the circumstances at the time...