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Home Owner’s Claim of Fraud in the Inducement of a Home Financing Contract Not Preempted by Federal Home Owners’ Loan Act

Charlotte McCauley v. Home Loan Investment Bank
Case No.: 12-1181 (U.S. Court of Appeals for the Fourth Circuit, March 25, 2013)

by Eric M. Leppo, Associate
Semmes, Bowen & Semmes (

In this recently issued Opinion from the United States Court of Appeals for the Fourth Circuit, the Court of Appeals affirmed in part, but reversed in part, the U.S. District Court for the Northern District of West Virginia’s dismissal of Plaintiff’s lawsuit finding that only one of Plaintiff’s state law claims was preempted by Federal statute.

Plaintiff/Appellant Charlotte McCauley purchased real property in West Virginia in 2001 on a land installment contract. In 2006 she contacted Ocean Bank, F.S.B. to obtain financing to pay off the land contract. An appraiser for Ocean Bank set the value of the house as $51,000 or more, which Ms. McCauley claimed (in retrospect) was fraudulent and the house was actually worth only approximately $35,700. The Bank offered McCauley a loan of $51,000. She alleged that she was rushed to close, and received insufficient explanation of the terms including that her initial interest rate of 9.49 percent, was an "exploding" adjustable rate mortgage that could go as high as 15.49 percent.

The Plaintiff filed suit alleging state law claims of unconscionability and fraud against Home Loan Investment Bank as the successor in interest to Ocean Bank, and Deutshe Bank the loan holder. Ms. McCauley claimed under Count I that the contract was unconscionable due to the hurried closing, inadequate explanation, inflated appraisal, and loan terms she claimed to be substantively unfair. She argued that fraud occurred when the Bank misrepresented the value of the house to induce her to enter the contract.

Home Loan Investment Bank and Deutsche Bank removed the case to the Northern District of West Virginia on diversity grounds and thereafter moved to dismiss the complaint. Defendants argued that the claims were preempted by Federal Law, specifically the Home Owners’ Loan Act ("HOLA"), 12 U.S.C. § 1461 et seq., and its implementing regulation, 12 C.F.R. § 560.2. The district court dismissed each of McCauley’s claims on the grounds of preemption, and Plaintiff appealed the decision to the Fourth Circuit.

The Fourth Circuit first addressed the legislative purpose of HOLA, stating Congress enacted the law during the Great Depression in order to "restore public confidence by creating a nationwide system of federal savings and loan associations to be centrally regulated according to nationwide ‘best practices.’” McCauley at *4 (quoting Silvas v. E*Trade Mortg. Corp., 514 F.3d 1001, 1004 (9th Cir. 2008)).

The Court then noted that while HOLA does not itself detail its preemptive effect on state laws, the implementing regulation from the Office of Thrift Supervision does, explaining that the agency "occupies the entire field of lending regulation for federal savings associations." 12 C.F.R. § 560.2(a). The regulation also provides, however, that state laws are not preempted "to the extent that they only incidentally affect the lending operations of Federal savings associations” or “are otherwise consistent with its purposes.” Id. at (c).

The Fourth Circuit affirmed the district court’s ruling that the claim of unconscionability was preempted, finding that Plaintiff sought to impose new, substantive requirements on mortgage lenders. As they would essentially establish a basic framework for commerce, such including laws prohibiting deceptive practices they entered HOLA’s field and were preempted by the statute.

The Fourth Circuit held otherwise. In regard to Plaintiff’s claim of fraud in the inducement, the Court noted that HOLA and implementing regulations do not intend to preempt laws that create basic norms and underlie commercial transactions or affect basis contract rights. The Court found that Plaintiff’s straightforward fraud claim was not likely to affect the regulatory landscape, or interfere with the Office of Thrift Supervision’s implementation of HOLA. As such, the district court decision was reversed and the matter remanded on this Count.