A decision this week by the U.S. Court of Appeals for the Ninth Circuit bolsters the position of national banks that the National Bank Act (NBA) and regulations of the Office of the Comptroller of the Currency (OCC) trump state laws on fee-related practices.

In Martinez v. Wells Fargo Home Mortgage , issued on March 9, 2010, the court ruled that the NBA preempted the plaintiffs' state laws claims that Wells Fargo had engaged in "unfair" or "fraudulent" conduct under the California Unfair Competition Law (CUCL) by marking up charges and overcharging for services when they refinanced their mortgage loan.

Ballard Spahr lawyers are currently defending several class actions involving depositors' claims that national banks violated state law by using "high to low" order and other practices to post checking account transactions and thereby increase overdraft fees. Martinez reinforces the national banks' position in those cases that the NBA and OCC regulations preempt the application of state law to their posting practices.

In Martinez, the plaintiffs alleged that an $800 underwriting fee was excessive or an "overcharge" because the amount was not reasonably related to the lender’s actual underwriting costs. They also alleged that a $75 tax service fee represented a "mark-up" because the fee was more than what Wells Fargo was charged by its affiliate for providing tax services.

The plaintiffs claimed that the overcharge and mark-up constituted "unfair" competition under the CUCL, and added that Wells Fargo's failure to disclose the actual costs of the underwriting and tax services constituted "fraudulent" practices under the California law.

However, the Ninth Circuit held that both CUCL claims were preempted by the NBA and OCC regulations that consider the establishment of non-interest fees and their amounts to be business decisions made by each national bank and that allow national banks to make real estate loans without regard to state disclosure requirements.

The court also found that the plaintiffs had failed to state a claim that Wells Fargo had engaged in "unlawful" conduct under the CUCL by violating various federal and state laws. According to the court, the alleged violations could not serve as predicate violations for the "unlawful" conduct claim because the Real Estate Settlement Procedures Act (RESPA) did not require Wells Fargo to show its costs for underwriting or tax services on the HUD-1 settlement statement, as plaintiffs alleged, and the NBA preempted any state laws addressing Wells Fargo’s conduct.

Martinez should also further deter attempts by borrowers to use Section 8(b) of RESPA to challenge mortgage settlement fees. Section 8(b) prohibits the giving or acceptance of a portion of a settlement fee "other than for services actually performed." In holding that Section 8(b) does not apply to overcharges, the Ninth Circuit joins the Second, Third, and Eleventh Circuits in rejecting Section 8(b) claims for overcharges. (The plaintiffs did not pursue on appeal their other RESPA claim that Wells Fargo's alleged mark-up of the tax service fee violated Section 8(b). The circuits are currently split on whether Section 8(b) covers mark-ups.)

Ballard Spahr's Consumer Financial Services Group is nationally recognized for its guidance in structuring and documentation of new consumer financial services products, its significant experience with the full range of federal and state consumer credit laws throughout the country, and its skill in litigation defense and avoidance (including pioneering work in pre-dispute arbitration programs). For more information, please contact group Chair Alan S. Kaplinsky, 215.864.8544 or kaplinsky@ballardspahr.com; Vice Chair Jeremy T. Rosenblum, 215.864.8505 or rosenblum@ballardspahr.com; John L. Culhane, Jr., 215.864.8535 or culhane@ballardspahr.com; Barbara S. Mishkin, 215.864.8528 or mishkinb@ballardspahr.com; or Mark J. Furletti, 215.864.8138 or furlettim@ballardspahr.com.


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