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McCauley v. Home Loan Investment Bank, No. 12-1181

Decided: March 25, 2013

Charlotte McCauley appealed the district court’s dismissal of her state law claims against Home Loan Investment Bank, F.S.B. (Home Loan) and Deutsche Bank National Trust Company (Deutsche Bank). The district court held that McCauley’s claims were preempted by the Home Owners’ Loan Act (“HOLA”). The Fourth Circuit Court of Appeals affirmed in part, revered in part, and remanded for further proceedings.

In 2001, McCauley bought a home in West Virginia under an installment sales contract. In 2006, McCauley paid off the installment sales contract with financing from Ocean Bank, F.S.B. (Ocean Bank). According to McCauley, the Ocean Bank appraiser falsely represented the value of the home as $51,000 or more, when it was actually worth approximately $35,700. Based on its assessment, Ocean Bank loaned McCauley $51,000. McCauley further alleged that during the loan closing, she received inadequate explanation of the closing documents. McCauley’s initial interest rate was 9.4 percent, but the loan was actually an adjustable rate mortgage that allowed the interest rate to “explode” to 15.49 percent. Because of the high interest rate, McCauley struggled with her loan payments and ultimately declared bankruptcy in 2010. Subsequently, McCauley sued Home Loan, the successor in interest to Ocean Bank, in West Virginia state court on the grounds of unconscionability and fraud. McCauley argued that the mortgage contract was unconscionable for the following reasons: the closing was hurried and conducted with inadequate explanation, the loan was induced by an inflated appraisal, and the loan’s terms were substantively unfair. Also, McCauley argued that Ocean Bank committed fraud by misrepresenting the market value of her property for the purpose of inducing her into the mortgage contract. At trial, the district court dismissed McCauley’s claims on the ground that they were preempted by HOLA. McCauley then filed a timely appeal.

The Fourth Circuit explained that under HOLA’s implementing regulation, certain types of laws are specifically preempted. The district court analyzed each aspect of McCauley’s unconscionability claim—the hurried closing, the inducement by inflated appraisal, the disparity between the size of the loan, and the value of the home—and found that each was of the nature of the laws specifically preempted under HOLA. McCauley argued that if the district court had analyzed her unconscionability claim as a whole instead in pieces, it would have determined that it was not preempted under HOLA. The Fourth Circuit disagreed and held that HOLA’s framework requires an analysis of each component of a plaintiff’s claim. Therefore, the court found that McCauley’s unconscionability allegations were specifically preempted.

Despite its ruling on the unconscionable claim, the court found that McCauley’s fraud claim was not preempted under HOLA.  The court first found that intentional misrepresentation is not specifically preempted. Under the HOLA framework, however, a law can still be preempted if it “affects lending.” The court held that intentional misrepresentation only incidentally affects lending, and therefore, it reversed the district court’s dismissal of McCauley’s fraud claim.

Full Opinion

-Graham Mitchell