A national bank is not bound by state laws that would restrict the fees it can include in principal when making a reverse mortgage loan, the U.S. District Court for the District of Minnesota has ruled.

In Taft v. Wells Fargo Bank, N.A., decided on November 1, 2011, the plaintiff alleged in a purported class action complaint that the bank had violated Minnesota and South Dakota law by including origination fees, servicing fees, and mortgage insurance charges in the principal amount of her mother’s reverse mortgage loan. As an initial matter, the court rejected her argument that the loan agreement’s choice-of-law provision barred the bank from relying on preemption and required the application of Minnesota law. Instead, the court found that the provision contemplated that the agreement would be governed by federal law and the law in which the mortgaged property was located.

The court also rejected the plaintiff’s claim that Minnesota and South Dakota, by opting out of the National Housing Act (NHA) limits on “the amount of interest which may be charged” on reverse mortgages, could determine the types of fees on which interest may be charged. Finding no right for a state to opt out of all NHA regulations, the court was unwilling to conclude that an opt-out allowed a state to define “what constitutes interest” for purposes of limiting the fees that can be included in principal.

“It would be illogical for Congress to authorize banks to enter into reverse mortgage loans pursuant to strict national standards but then allow each state to set its own requirements for what may be included or not included” in principal, U.S. District Judge Susan Richard Nelson wrote.

Also rejected by the court was the plaintiff’s argument that the bank was bound by state interest definitions because it had used its most favored lender authority under Section 85 of the National Bank Act to make the loan.

In addition to dismissing her claims that the bank had violated state law by including the three charges in principal, the court dismissed the plaintiff’s breach of contract and unjust enrichment claims. According to the court, the bank had not breached the loan agreement by charging a higher interest rate than the agreement or Minnesota law allowed and an unjust enrichment claim was precluded by the existence of a valid agreement.

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