Opinion ID: 3033121
Heading Depth: 2
Heading Rank: 3

Heading: DIDMCA Preemption

Text: Wells Fargo also maintains that the California “per diem” loan-interest statute the Commissioner sought to enforce, precluding the charging of mortgage interest during certain prerecordation periods, is substantively preempted by the DIDMCA. Despite our earlier rulings, we must decide this substantive preemption issue because it is pertinent to the reach of the permanent injunction the district court may properly issue. [18] In relevant part, the DIDMCA express preemption provision, section 501(a)(1), mandates that “[t]he provisions of the constitution or the laws of any State expressly limiting the rate or amount of interest, discount points, finance charges, or other charges which may be charged, taken, received, or reserved shall not apply to any loan, mortgage, credit sale, or advance . . . .” that meets certain conditions. 12 U.S.C. § 1735f-7a(a)(1); see also Brown v. Investors Mortgage Co., 121 F.3d 472, 475 (9th Cir. 1997) (per curiam) 23 Whether the preemption analysis would be the same for all OCC licensing of national bank subsidiaries, including financial subsidiaries, is a question not before us, and one on which we express no opinion. 10484 WELLS FARGO BANK v. BOUTRIS (summarizing and applying the statute). Neither party disputes that WFHMI’s home-lending activities here at issue meet the other conditions imposed by the DIDMCA exemption. The debate is solely whether the California per diem interest statute “expressly limit[s] the rate or amount of interest.” The California statutory provision with which we are concerned is CAL. CIV. CODE § 2948.5(a).24 At the relevant times,25 that section provided: A borrower shall not be required to pay interest on a principal obligation under a promissory note secured by a mortgage or deed of trust on real prop- erty improved with between one to four residential dwelling units for a period in excess of one day prior to recording of the mortgage or deed of trust if the loan proceeds are paid into escrow or, if there is no escrow, the date upon which the loan proceeds have been made available for withdrawal as a matter of right, as specified in subdivision (d) of Section 12413.1 of the Insurance Code. If a congressional statute includes a provision explicitly preempting state law, the only issue we must decide is its scope, using ordinary tools of statutory construction. See, e.g., Cipollone v. Liggett Group, Inc., 505 U.S. 504, 517-18 24 The district court referenced section 50204(o) of the California Finance Code, which bars CRMLA licensees from “[c]ommit[ting] an act in violation of Section 2948.5 of the Civil Code.” Our holding that the CRMLA licensing requirements are preempted means that section 50204(o) is (and was) not enforceable against operating subsidiaries. The applicability of section 2948.5, however, does not turn on whether the lender is a licensee. Our conclusion that California’s licensing requirements are preempted therefore does not moot the DIDMCA preemption issue. 25 The provision has since been amended, and now bars the collection of per diem interest more than one day before disbursement, as opposed to before recordation. WELLS FARGO BANK v. BOUTRIS 10485 (1992); Indep. Towers of Wash. v. Washington, 350 F.3d 925, 928 (9th Cir. 2003). The determinative question under the DIDMCA preemption provision, 12 U.S.C. § 1735f-7a(a)(1), is thus whether section 2948.5(a) serves “expressly” to limit the “rate or amount of interest” that WFHMI may assess against California borrowers. The district court concluded that it does. In its words: California’s per diem statutes limit the time during which interest can be charged by prohibiting a lender from charging interest on loaned mortgage funds for a period in excess of one day prior to recordation of the mortgage. By restricting the time period in which a lender may collect interest on loaned mortgage funds, the language of the per diem statutes “ex- pressly limit[s] the rate or amount of interest . . . which may be charged . . . .” Wells Fargo II, 265 F. Supp. 2d at 1175 (quoting 12 U.S.C. § 1735f-7a(a)(1)) (alteration in original) (citations omitted). We do not agree with this interpretation of the DIDMCA. We are instead convinced by the First Circuit’s analysis in Grunbeck v. Dime Savings Bank of New York, FSB, 74 F.3d 331 (1st Cir. 1996), and believe it fully applicable to California’s per diem loan-interest statute. In Grunbeck, the court considered whether section 501(a)(1) of the DIDMCA preempted New Hampshire’s simple interest statute (SIS), which required lenders to compute their interest rate by summing “simple interest,” i.e., by not charging interest on unpaid interest. See N.H. REV. STAT. ANN. § 397-A:14. Dime Savings Bank argued that requiring lenders to abide by the SIS would implicate the “rate or amount of interest” chargeable against the borrower, and that the SIS was therefore preempted by the DIDMCA. The First Circuit 10486 WELLS FARGO BANK v. BOUTRIS held that there was no DIDMCA preemption, for two primary reasons, both persuasive and both applicable here: [19] First, Grunbeck emphasized that the DIDMCA is concerned with only the “rate” and “amount” of interest charged, not with other features of the interest calculation: [Dime Savings Bank’s] arguments rest on the implicit premise that the “amount” of interest the lender may charge is “limited” by the SIS. On the contrary, the SIS imposes no restriction on either the “rate” or the “amount” of interest the borrower may be charged, but merely requires that any interest rate or amount agreed to by the parties be computed on a “simple interest” basis. Thus, nothing in the SIS prevents a lender from contracting for whatever simple interest rate will exact an interest return equal to or greater than whatever rate and amount of interest would be recoverable through compounding. The SIS leaves entirely to the parties the rate and amount of simple interest to be exacted. Id. at 337. [20] Here, similarly, the only direct restriction was on the time for which interest may be charged, not on the rate that may be charged when interest is in effect or the total amount of interest that may be charged over the life of the loan.26 Banks were free to alter the post-recordation rate of interest to account for any pre-recordation no-interest period, thereby collecting the same total amount of interest as they would have collected had they charged interest pre-recordation. We agree with the First Circuit’s approach, and hold that where “rates” and “amounts” of interest remain fully adjustable so 26 However compounded, an interest rate is usually defined as “a percentage of the principal payable for a one-year period,” BLACK’S LAW DICTIONARY 831 (8th ed. 2004) — that is to say, a certain percent per year. WELLS FARGO BANK v. BOUTRIS 10487 that banks can obtain the same return that they would have otherwise, a state regulation is not banned by the DIDMCA. Second, and relatedly, Grunbeck gave careful attention to an unusual feature of the language of section 501(a)(1) of the DIDMCA — that it preempts only express limitations on rates and amounts of interest. As Grunbeck explained, this textual feature must be given effect by “focus[ing] . . . on whether the ‘express’ language of the [state statute] ‘limit[s]’ the rate or amount of interest which the lender may charge,” not “on broad-gauged assessments concerning the likely impact the [state] ban on compounding would have on home-mortgage lenders and the industry at large.” Id. at 337-38 (third alteration in original). Any other “analytic focus . . . undermines the required ‘plain language’ interpretation by extirpating — from the pivotal section 501(a) clause: ‘expressly limiting the rate or amount of interest’ — the important modifier ‘expressly.’ ” Id. at 337 (citation omitted). With this textual analysis we agree as well. Here, as in Grunbeck, there may well be practical reasons why banks will not adjust their rates or amounts of interest to account for the state restriction. As Grunbeck held, however, the DIDMCA does not apply because of “likely impact,” as long as there is no express limitation on interest rates or amounts.27 Wells Fargo argues that, aside from any impact theory, the California per diem statute does expressly limit an interest rate — it limits interest to zero percent for the period prior to recordation. While clever, this argument again disregards the critical and unusual modifier, “expressly.” 27 For reasons identified by Grunbeck, Quicken’s argument that we should defer to the interpretation of the federal Office of Thrift Supervision is deficient. See Grunbeck, 74 F.3d at 336 (“Where Congress has spoken directly to the issue, an interpretation rendered by the agency responsible for administering the statute is entitled to no special deference.” (citing Chevron, 467 U.S. at 842)). 10488 WELLS FARGO BANK v. BOUTRIS “Expressly” the per diem interest statute addresses only the time period for which interest may be assessed, not the rate of interest permissible for a period during which some interest is payable. It would be odd to refer to a prohibition on collection of interest as a limitation specifically on the rate of interest, as opposed to a limitation on the imposition of interest or on the time period which interest may cover. Also, the evident purpose of the statute, albeit imperfectly addressed, is to protect consumers by providing an incentive for completion of tasks necessary to perfect the purchase, not to limit the rate or amount of interest paid; as long as recordation was completed, any amount of interest could be charged. [21] For these reasons, we hold that California’s per diem interest statute, CAL. CIV. CODE § 2948.5, is not preempted by section 501(a)(1) of the DIDMCA, 12 U.S.C. § 1735f7a(a)(1).