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Fed. Judge Limits Maryland Lending Laws

A federal judge in Maryland has permanently enjoined the state from enforcing its mortgage lending laws against national banks and their operating subsidiaries, concluding that such power is vested solely with the federal government.

Judge Catherine C. Blake of the District of Maryland ruled in favor of National City Bank of Indiana and two of its subsidiaries. The banks had brought suit to block Commissioner of Financial Regulation Charles W. Turnbaugh from limiting their ability to collect mortgage loan prepayment fees and from exercising any visitorial and regulatory powers over them.

According to court records, the underlying lawsuit arose after the commissioner's office received two separate customer complaints in June 2004 concerning a prepayment penalty provision in mortgage loans originated by NCB subsidiaries First Franklin Financial Corp. and National City Mortgage.

The commissioner's office forwarded the complaints to the banks and indicated that the penalty ran afoul of Md. Code Ann. Com. Law § 12-105(b)(4), which restricts the amount of prepayment fees mortgage lenders may impose.

First Franklin responded that the prepayment fees are governed by and appropriate under federal law.

The bank, NCB and National City then filed suit in August 2004 against the commissioner to forestall any further inquiry into its collection of prepayment fees from Maryland customers.

The complaint sought a declaration that federal law preempts enforcement of Section 12-105(b)(4). The complaint also asserted that the plaintiffs, as a national bank and its operating subsidiaries, are subject to the exclusive regulatory and supervisory authority of the federal Office of the Comptroller of the Currency. As a result, the banks contended that Maryland lacks the authority to exercise any control over them under the state's Mortgage Lender Law.

Eventually, the banks and the state filed cross-motions for summary judgment. The banks received support from the OCC, which filed an amicus curiae brief.

Turnbaugh received support in briefs filed by the Conference of State Bank Supervisors and the individual states and commonwealths of Connecticut, Arizona, Colorado, Delaware, Florida, Hawaii, Idaho, Illinois, Iowa, Kansas, Maine, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Montana, Nevada, New York, North Carolina, North Dakota, Ohio, Oklahoma, Pennsylvania, Vermont and Washington.

Agreeing with the banks, Judge Blake ruled that the state laws at issue are preempted by the National Bank Act and several OCC implementing regulations.

In particular, the court found that Congress has delegated to the OCC the authority under the NBA to regulate national banks and their operating subsidiaries.

The judge cited recent rulings by several other federal District Courts that have found similarly grounded state laws preempted by federal regulations. Wachovia Bank N.A. v. Burke, 319 F. Supp.2d 275 (D.Conn.2004); Wachovia Bank N.A. v. Watters, 334 F. Supp.2d 957 (W.D.Mich.2004); Wells Fargo Bank N.A. v. Boutris, 265 F. Supp.2d 1162 (E.D.Cal.2003); National City Bank of Indiana v. Boutris, 2003 WL 21536818 (E.D.Cal. July 2, 2003).

Judge Blake also found that the banks would suffer "irreparable harm to their business and their federally authorized banking activities if they are forced to comply with the conflicting Maryland laws."