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Washington Mutual Bank v. Superior Court, 95 Cal.App.4th 606, 115 Cal.Rptr.2d 765, 02 Cal. Daily Op. Serv. 700, 2002 Daily Journal D.A.R. 901

Facts

The case arose from two class action lawsuits filed against Washington Mutual Bank by Steven Guilford and Robert W. Guilford, and Stuart C. Talley, on behalf of borrowers in California. The plaintiffs alleged that Washington Mutual, along with its predecessor, charged borrowers one day's pre-closing interest on home loans, which they claimed violated California's Civil Code section 2948.5, the Unfair Practices Act, and the Consumers Legal Remedies Act. Washington Mutual demurred to these claims, arguing that they were preempted by federal law under the Home Owners' Loan Act (HOLA).

The Guilford complaint alleged that Washington Mutual and its predecessor in interest, Home Savings of America, FSB, originated thousands of residential mortgage loans in California and, in connection with those loans, required borrowers to pay, prior to close of escrow, one day's pre-closing interest.

Issue

The main legal issues were whether the HOLA and its implementing regulations preempted state law claims against Washington Mutual for charging pre-closing interest, and whether California's Civil Code section 2948.5 prohibited such charges when loan proceeds were deposited into escrow via wire or electronic transfer.

This case presents two issues. The first is whether the HOLA, together with its implementing regulations, preempts state law claims alleging that Washington Mutual, a federal savings and loan association, violated Section 2948.5, the UPA, and the Consumers Legal Remedies Act by charging pre-closing interest on home loans.

Rule

The court applied the principle of federal preemption, stating that federal law can preempt state law when Congress intends to occupy a field exclusively, and that the Office of Thrift Supervision (OTS) has the authority to regulate federal savings associations under the HOLA.

Congress has the authority to preempt state law by virtue of the supremacy clause of the United States Constitution, which provides that 'Laws of the United States … shall be the supreme Law of the Land; and the Judges in every State shall be bound thereby, any Thing in the Constitution or Laws of any State to the Contrary notwithstanding.'

Analysis

The court found that the OTS had explicitly occupied the field of lending regulation for federal savings associations through its regulations, which preempted state laws that attempted to regulate lending practices. The court determined that the state law claims regarding pre-closing interest were directly related to the terms of credit, which fell under the preempted categories outlined in the OTS regulations. Therefore, the court concluded that the state law claims were preempted by federal law.

Charging interest and disbursing loan proceeds, we conclude, fall within the category of 'terms of credit' as that phrase is used in paragraph (b)(4) of 12 Code of Federal Regulations section 560.2.

Conclusion

The Court of Appeal issued a writ of mandate directing the trial court to vacate its order overruling Washington Mutual's demurrers, thereby concluding that the state law claims were preempted by federal regulations.

Accordingly, we conclude that the trial court's order overruling Washington Mutual's demurrers to those causes of action contained within the Guilford and Talley complaints alleging violations of Section 2948.5, the UPA, and the Consumers Legal Remedies Act must be set aside.

Who won?

Washington Mutual prevailed in the case because the court found that the state law claims were preempted by federal regulations under the HOLA, which allowed the bank to charge pre-closing interest.

Washington Mutual contends that by its terms Section 2948.5 does not apply to loan proceeds deposited into an escrow account by a wire or electronic transfer.

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