In re Ocwen Loan Servicing, LLC Mortg. Serv. Lit.

• Decision Date: 22 June 2007
• Docket Number: No. 06-3132.,06-3132.
• Citation: 491 F.3d 638
• Parties: In re: OCWEN LOAN SERVICING, LLC MORTGAGE SERVICING LITIGATION. Appeal of: Ocwen Loan Servicing, LLC, and Moss, Codilis Stawiarski, Morris, Schneider & Prior, LLP.
• Court: U.S. Court of Appeals — Seventh Circuit

491 F.3d 638

In re: OCWEN LOAN SERVICING, LLC MORTGAGE SERVICING LITIGATION.

Appeal of: Ocwen Loan Servicing, LLC, and Moss, Codilis Stawiarski, Morris, Schneider & Prior, LLP.

No. 06-3132.

United States Court of Appeals, Seventh Circuit.

Argued March 28, 2007.

Decided June 22, 2007.

Kelly M. Dermody, Gary E. Klein (argued), Lieff, Cabraser, Heimann & Bernstein, San Francisco, CA, Cathleen M. Combs, Edelman, Combs & Latturner, Chicago, IL, Niall P. McCarthy, Cotchett, Illston & Pitre, Burlingame, CA, for Plaintiff-Appellee.

David J. Chizewer, Goldberg, Kohn, Bell, Black, Rosenbloom & Moritz, Chicago, IL, Daniel M. Noland, Dykema Gossett, Chicago, IL, Brian P. Brooks (argued), O'Melveny & Meyers, Washington, DC, for Defendants-Appellants.

Allen S. Rugg, Powell Goldstein, Nina F. Simon, AARP Foundation Litigation, Washington, DC, for Amicus Curiae.

Before POSNER, ROVNER, and SYKES, Circuit Judges.

POSNER, Circuit Judge.

The defendants in this class action have been permitted to appeal under 28 U.S.C. § 1292(b) from the district judge's refusal to dismiss, as preempted by the Home Owners Loan Act ("HOLA"), 12 U.S.C. §§ 1461 et seq., and implementing regulations promulgated by the Office of Thrift Supervision, 12 C.F.R. §§ 560.1 et seq., the plaintiffs' claims under California, Connecticut, Illinois, New Mexico, and Pennsylvania law. Pursuant to 28 U.S.C. § 1367 (supplemental jurisdiction), the plaintiffs appended these state-law claims to their federal-law claims, upon which the district court's jurisdiction was premised; these are claims under the Fair Debt Collection Practices Act, 15 U.S.C. §§ 1692 et seq., the Real Estate Settlement Procedures Act, 12 U.S.C. §§ 2601 et seq., and the Truth in Lending Act, 15 U.S.C. §§ 1601 et seq.

The complaint is a hideous sprawling mess, 40 pages in length with 221 paragraphs of allegations. We have found it difficult and in many instances impossible to ascertain the nature of the charges. It would have been better had the defendants deferred their motion, and the district judge his ruling, until either the defendants served contention interrogatories designed to smoke out what exactly the plaintiffs are charging, or better, because quicker and cheaper, the judge told the plaintiffs to specify the acts of the defendants that they are complaining about so that he could decide how much of the complaint was preempted. Still, the defendants can hardly be blamed for wanting to strangle the monster in its crib.

Ocwen, the principal defendant and the only one we need discuss (the other defendant is a law firm charged with having assisted Ocwen in the misconduct of which the plaintiffs complain), was at the times relevant to this case a federal savings and loan association engaged in servicing home mortgages originated by other lenders. When a loan is secured by a mortgage, the borrower may be asked to sign various transfer agreements that allow the mortgagee to assign not only the mortgage itself but also or instead various rights that the mortgage grants the mortgagee, such as the rights to collect monthly payments from the mortgagor, collect late payments from him, foreclose in the event of default, or place the mortgagor's payments for taxes and insurance premiums in escrow. The administration of these rights is called "servicing" the mortgage. If the firm doing the servicing, such as Ocwen in this case, exceeds its rights under the transfer agreements, the mortgagor's recourse is against that firm rather than against the original mortgagee or the current holder of the mortgage. See OTS Regulatory Handbook: Thrift Activities 571.1 (Jan.1994), www.ots.treas.gov/docs/4/429128.pdf (visited June 5, 2007); "Mortgage Servicing Rights: Traded Like Baseball Cards?," www.mortgagenewsdaily. com/662005—Mortgage—Servicing.asp (visited June 5, 2007).

Enacted in 1933, HOLA is "a product of the Great Depression of the 1930's, [and] was intended `to provide emergency relief with respect to home mortgage indebtedness' at a time when as many as half of all home loans in the country were in default." Fidelity Federal Savings & Loan Ass'n v. de la Cuesta, 458 U.S. 141, 159, 102 S.Ct. 3014, 73 L.Ed.2d 664 (1982) (citations omitted). HOLA empowered what is now the Office of Thrift Supervision in the Treasury Department to authorize the creation of federal savings and loan associations, to regulate them, and by its regulations to preempt conflicting state law. Id. at 161-62, 102 S.Ct. 3014. Ocwen has given up its federal thrift charter; but this does not affect its defense that when it committed the acts for which the plaintiffs are suing any state-law claims based on those acts were preempted.

One of OTS's regulations, the validity of which is not questioned, allows federal S & Ls to "extend credit as authorized under federal law . . . without regard to state laws purporting to regulate or otherwise affect their credit activities." 12 C.F.R. § 560.2(a). The regulation goes on to provide:

(b) Illustrative examples [of what federal S & Ls can do without regard to state laws]. Except as provided in § 560.110 of this part, the types of state laws preempted by paragraph (a) of this section include, without limitation, state laws purporting to impose requirements regarding:

(1) Licensing, registration, filings, or reports by creditors;

(2) The ability of a creditor to require or obtain private mortgage insurance, insurance for other collateral, or other credit enhancements;

(3) Loan-to-value ratios;

(4) The terms of credit, including amortization of loans and the deferral and capitalization of interest and adjustments to the interest rate, balance, payments due, or term to maturity of the loan, including the circumstances under which a loan may be called due and payable upon the passage of time or a specified event external to the loan;

(5) Loan-related fees, including without limitation, initial charges, late charges, prepayment penalties, servicing fees, and overlimit fees;

(6) Escrow accounts, impound accounts, and similar accounts;

(7) Security property, including leaseholds;

(8) Access to and use of credit reports;

(9) Disclosure and advertising, including laws requiring specific statements, information, or other content to be included in credit application forms, credit solicitations, billing statements, credit contracts, or other credit-related documents and laws requiring creditors to supply copies of credit reports to borrowers or applicants;

(10) Processing, origination, servicing, sale or purchase of, or investment or participation in, mortgages;

(11) Disbursements and repayments;

(12) Usury and interest rate ceilings to the extent provided in 12 U.S.C. 1735f-7a and part 590 of this chapter and 12 U.S.C. 1463(g) and § 560.110 of this part; and

(13) Due-on-sale clauses to the extent provided in 12 U.S.C. 1701j-3 and part 591 of this chapter.

(c) State laws that are not preempted. State laws of the following types are not preempted to the extent that they only incidentally affect the lending operations of Federal savings associations or are otherwise consistent with the purposes of paragraph (a) of this section:

(1) Contract and commercial law;

(2) Real property law;

(3) Homestead laws specified in 12 U.S.C. 1462a(f);

(4) Tort law;

(5) Criminal law; and

(6) Any other law that OTS, upon review, finds:

(i) Furthers a vital state interest; and

(ii) Either has only an incidental effect on lending operations or is not otherwise contrary to the purposes expressed in paragraph (a) of this section.

Ocwen makes much of the fact that the Office of Thrift Supervision has said that in applying the regulation a court should first decide whether the state law in question is listed in subsection (b) and, if so, Ocwen argues, that is the end of the case. "OTS Final Rule," 61 Fed.Reg. 50951, 50966 (Sept. 30, 1996). Well, of course. And the OTS's statement further explains that subsection (c), the list of laws that are not preempted, is designed merely "to preserve the traditional infrastructure of basic state laws that undergird commercial transactions, not to open the door to state regulation of lending by federal savings associations." Id. The list in subsection (c) is long and the categories it covers—contract and commercial law, tort law, and so forth—are very broad. It would not do to let the broad standards characteristic of such fields morph into a scheme of state regulation of federal S & Ls. Hence the statement in subsection (c) that state laws escape preemption only "to the extent that they only incidentally affect the lending operations of Federal savings associations or are otherwise consistent with the purposes of paragraph (a) of this section." See also Bank of America v. City & County of San Francisco, 309 F.3d 551, 557-61 (9th Cir.2002); Haehl v. Washington Mutual Bank, F.A., 277 F.Supp.2d 933, 939-40, 942-43 (S.D.Ind.2003); cf. Barnett Bank of Marion County, N.A. v. Nelson, 517 U.S. 25, 33-34, 116 S.Ct. 1103, 134 L.Ed.2d 237 (1996).

The line between subsections (b) and (c) is both intuitive and reasonably clear. The Office of Thrift Supervision has exclusive authority to regulate the savings and loan industry in the sense of fixing fees (including penalties), setting licensing requirements, prescribing certain terms in mortgages, establishing requirements for disclosure of credit information to customers, and setting standards for processing and servicing mortgages. See 12 U.S.C. §§ 1462, 1463, 1464; 12 C.F.R. §§ 500.1, 500.10; "OTS Final Rule," supra, 61 Fed. Reg. at 50965. But though it has some prosecutorial and adjudicatory powers ancillary to its regulatory functions, 12 U.S.C. § 1464(d); 12 C.F.R. § 509.1; Simpson v. Office of Thrift Supervision, 29 F.3d 1418, 1422 (9th Cir.1994), the Office has no power to adjudicate disputes between the S & Ls and their customers. See OTS, "How to Resolve a Consumer Complaint" 1-2,...