IAMB v. Office of Banks and Real Estate and William Darr, Which Side Will Win the Hugo Award?

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by Howard A. Lax, Esq.
Lipson, Neilson, Cole, Seltzer & Garin, P.C.

7th Circuit Court of Appeals, October 21, 2002
Illinois Association of Mortgage Brokers v. Office of Banks and Real Estate

First, let me point out that I have not read the District Court decision or the briefs on appeal, so I am commenting without the benefit of all of the background available to the Court of Appeals. Having given this warning (disclosure?), I have never been stopped from providing my two cents regarding the field of federal court decisions impacting mortgage lending.

This decision reverses a District Court decision holding that federal law preempts Illinois and City of Chicago anti-predatory lending regulations and ordinances when an "alternative mortgage transaction" is originated in conformity with the Alternative Mortgage Transaction Parity Act (the "Parity Act"). IAMB argued that when Congress passed HOEPA, these laws were incorporated into the framework of federal lending rules that "preempted the field" of laws for federal savings associations under HOLA and, therefore, federal savings associations did not have to follow state and local anti-predatory lending rules. IAMB then bootstrapped this argument into an argument that the Parity Act gives state chartered mortgage lenders the benefit of "preemption of the field" of lending regulation for alternative mortgage transactions that is available to federal savings associations, since this is the only way that state chartered lender can have true "parity" with federal savings associations. This is an argument that a younger sibling makes to a parent: "When Tommy gets to stay up until midnight, so should I." While it is true that federal law gives state lenders parity with federal savings associations for alternative mortgage transactions, the parity only exists to the extent that the OTS identifies specific federal rules as applicable to state lenders making alternative mortgage transactions.

If this is not confusing enough, the State of Illinois argued that it cannot be sued in federal court, and the City of Chicago argued that Congress did not state that the Parity Act really preempted state laws. The Court held that the Illinois Commissioner could be sued, and that Congress did not have to say that it meant to "really really" preempt state laws when it did so.

The City also tried to argue that since the Parity Act only applies to licensed lenders, the City and State could set standards for loan terms offered by state lenders, and revoke their licenses if these loan terms were not followed. The Court congratulated the State of Illinois for not trying to make this argument in its presentation:

"Smuggling the regulation of terms into the criteria for issuing licenses, and then arguing that state-chartered lenders lose all benefits of the 1982 Act, would be a stunt unworthy of the State of Illinois-and ineffective as a matter of federal law." 1

The Court held that the City's proposed scheme is in conflict with federal law, and would be preempted if enacted. Nice try, but no cigar.

The Court of Appeals held that state and local anti-predatory lending ordinances were not per se preempted. Federal preemption only occurs when (1) a state or local regulation directly conflicts with federal law (i.e. federal law sets a minimum for "high cost" lending disclosures, so a state could not permit "high cost" loans without federal Section 32 disclosures), or (2) state laws transgress into areas identified by the OTS as preempted under the Parity Act. The court noted:

"At one time the OTS believed that state lenders always could use whatever terms were lawful for federal lenders. More recently, however, the OTS has taken the position that only federal regulations accompanied by a declaration of preemptive force affect state law. See 67 Fed. Reg. at 60548 n.36. On this view states may put off limits to state-chartered lenders some of the terms that are lawful for federal lenders. The district court must determine which of these views is legally correct and then ascertain which provisions of the state regulations are incompatible with the federal regulations now in force."

The Court of Appeals remanded the case back to the District Court "with instructions to dismiss the Office of Banks and Real Estate as a party and to issue a declaratory judgment resolving which state regulations are preempted by the combination of ?3803(c) and the OTS regulations governing federal lenders."

The Hugo Award is an annual award for the best writing in the field of science fiction and/or fantasy. A recent winner was the fourth Harry Potter book.

"The Hugo Award was named in honor of Hugo Gernsback, "The Father of Magazine Science Fiction," as he was described in a special award given to him in 1960.

The Hugo Award, also known as the Science Fiction Achievement Award, is given annually by the World Science Fiction Society (WSFS). The distinguishing characteristics of the Hugo Award are that it is sponsored by WSFS, administered by the committee of the World Science Fiction Convention (Worldcon) held that year, and determined by nominations from and a popular vote of the membership of WSFS. In general, a Hugo Award given in a particular year is for work that appeared in the previous calendar year.

(From the Hugo Award Web site . "Hugo Award" is a Service Mark belonging to the World Science Fiction Society, an unincorporated literary society.)

First published on BankersOnline.com 10/22/02. Copyright, Howard A. Lax.