Court Backs State Rule on Mortgage Interest

A federal appeals court in California ruled that the operating units of nationally chartered banks generally cannot be regulated by states, but that California’s limits on mortgage interest charges were nevertheless valid.

Friday’s decision by the U.S. Court of Appeals for the 9th Circuit in San Francisco, in a case involving Wells Fargo & Co., follows a series of victories by big banks seeking to be regulated under federal laws rather than potentially stricter state laws.

The decision affirms U.S. District Judge Garland Burrell’s 2003 ruling that the National Bank Act and regulations issued by the Office of the Comptroller of the Currency preempt state regulation of the bank’s Wells Fargo Home Mortgage Inc. unit.

But it reverses Burrell’s finding that the state cannot stop banks from charging interest too early.

California’s Department of Corporations and San Francisco-based Wells Fargo were not immediately available for comment.

Wells Fargo is the fifth-largest bank and second-largest mortgage lender in the United States.

Last month, Wachovia Corp. won a similar preemption case involving Connecticut’s banking commissioner.

Dozens of state banking commissioners and attorneys general, including New York’s Eliot Spitzer, favor greater state oversight of banks, saying it could help reduce lending abuses. Among those opposing such efforts are the comptroller’s office and the Clearing House Assn., an 11-bank group whose members include Citigroup Inc., Bank of America Corp. and JPMorgan Chase & Co.

California had accused Wells Fargo Home Mortgage of violating state law by starting to charge interest more than one day before mortgages were recorded in county offices, costing about $200 per mortgage.

The state also ordered Wells Fargo to audit its residential mortgage loans. After the bank resisted, California revoked its mortgage lending license.

In her 33-page opinion, Judge Marsha Berzon concluded that California’s rules went too far. She said the comptroller’s office had “authority to displace contrary state regulation where the [National] Bank Act itself preempts contrary state regulation of national banks.”

Berzon said, though, that California’s rules on per-diem mortgage fees were valid, and not preempted by the Depository Institutions Deregulation and Monetary Control Act of 1980. She said the act was concerned with and preempted only express limits on the rate and amount of interest charged, not the time for which interest may be charged. Judges Stephen Reinhardt and Richard Paez joined Berzon’s opinion.

In June, the comptroller’s office and Clearing House filed lawsuits in a New York federal court to block Spitzer from investigating banks’ mortgage lending practices.