AFSA v. City of Oakland

• Decision Date: 31 January 2005
• Docket Number: No. S119869.,S119869.
• Citation: 23 Cal.Rptr.3d 453,104 P.3d 813,34 Cal.4th 1239
• Court: California Supreme Court
• Parties: AMERICAN FINANCIAL SERVICES ASSOCIATION, Plaintiff and Appellant, v. CITY OF OAKLAND et al., Defendants and Appellants.

23 Cal.Rptr.3d 453

34 Cal.4th 1239

104 P.3d 813

AMERICAN FINANCIAL SERVICES ASSOCIATION, Plaintiff and Appellant, v. CITY OF OAKLAND et al., Defendants and Appellants.

No. S119869.

Supreme Court of California.

January 31, 2005.

Severson & Werson, Mark Joseph Kenney, Jan T. Chilton and Donald J. Querio, San Francisco, for Plaintiff and Appellant.

Arnold & Porter, Laurence J. Hutt, Los Angeles, Dennis G. Lyons, Howard N. Cayne, Michael C. O'Brien and Nancy L. Perkins, Washington, D.C., for California Bankers Association as Amicus Curiae on behalf of Plaintiff and Appellant.

Horvitz & Levy, Lisa Perrochet and Bradley S. Pauley, Encino, for National Home Equity Mortgage Association as Amicus Curiae on behalf of Plaintiff and Appellant.

John A. Russo, City Attorney, Barbara J. Parker, Chief Assistant City Attorney, John Truxaw and Daniel Rossi, Deputy City Attorneys; Cotchett, Pitre, Simon & McCarthy, Joseph W. Cotchett, Burlingame, Marie Seth Weiner, Redwood City, Steven N. Williams, Burlingame and Jamie N. Gonzalez, Los Angeles, for Defendants and Appellants.

Norma P. Garcia for Consumers Union of U.S., Inc., as Amicus Curiae on behalf of Defendants and Appellants.

Kevin D. Stein for California Reinvestment Committee as Amicus Curiae on behalf of Defendants and Appellants.

Maeve Elise Brown for the National Housing Project, AARP, Association of Community Organizations for Reform Now (ACORN), Congress of California Seniors, Consumer Credit Counseling Service of the East Bay, Lao Family Community Development, Inc., and Spanish Speaking Unity Council of Alameda County, Inc., as Amicus Curiae on behalf of Defendants and Appellants.

Paul S. Cohen for Centro Legal de la Raza and La Raza Centro Legal as Amicus Curiae on behalf of Defendants and Appellants.

Robert Gnaizda, San Francisco, for Greenling Institute as Amicus Curiae on behalf of Defendants and Appellants.

Patricia G. Price for Legal Assistance for Seniors as Amicus Curiae on behalf of Defendants and Appellants.

John T. Fellows III, City Attorney (Torrance) for The League of California Cities as Amicus Curiae on behalf of Defendants and Appellants.

BROWN, J.

"Predatory lending" is a term generally used to characterize a range of abusive and aggressive lending practices, including deception or fraud, charging excessive fees and interest rates, making loans without regard to a borrower's ability to repay, or refinancing loans repeatedly over a short period of time to incur additional fees without any economic gain to the borrower. Predatory lending is most likely to occur in the rapidly growing "subprime" mortgage market, which is a market generally providing access to borrowers with impaired credit, limited income, or high debt relative to their income. Mortgages in this market tend to be in smaller amounts, and with faster prepayments and significantly higher interest rates and fees, than "prime" mortgages.

In 2001, California enacted legislation to combat predatory lending practices that typically occur in the subprime home mortgage market. (Fin.Code,¹ §§ 4970-4979.8 (Division 1.6).)² Eight days before Division 1.6 was signed into law by the Governor, the City of Oakland adopted an ordinance regulating predatory lending practices in the Oakland home mortgage market.³

We consider whether the Ordinance is preempted by Division 1.6, and if not, whether the Ordinance is nevertheless preempted by Civil Code section 1916.12. We conclude that the Ordinance is preempted by Division 1.6, and therefore reverse the judgment of the Court of Appeal.

I. FACTUAL AND PROCEDURAL BACKGROUND⁴

On October 15, 2001, American Financial Services Association (AFSA) filed this action against the City of Oakland and the Redevelopment Agency of the City of Oakland (City) seeking a declaration that the Ordinance was preempted by state law, and an injunction against its enforcement. On October 25, 2001, by stipulated order, the Ordinance was stayed pending, as relevant here, final resolution of this action. In December 2001, the trial court denied AFSA's motion for a preliminary injunction against enforcement of the Ordinance, and AFSA appealed from that order.

The parties then filed cross-motions for summary judgment. On June 21, 2002, the trial court entered an order finding that the Ordinance was preempted to the extent that it exempted federally chartered lending institutions from its restrictions. The court held that the sentence exempting such institutions should be severed from the Ordinance. Subject to elimination of the federal exemption, the court denied AFSA's summary judgment motion and granted the City's. Judgment was entered severing the sentence exempting federal lenders, dismissing AFSA's complaint, and deeming the Ordinance valid as modified.

AFSA appealed from the judgment, and the City cross-appealed. The Court of Appeal ordered the appeals and cross-appeal consolidated. The court held the Ordinance was not preempted by either Division 1.6 or Civil Code section 1916.12. It reversed the trial court's judgment insofar as it ordered severance of the portion of the Ordinance exempting federally chartered lenders from its coverage. In all other respects, the judgment was affirmed. AFSA's appeal from the denial of its motion for a preliminary injunction was dismissed as moot.

We granted AFSA's petition for review.

II. DISCUSSION

A. Background

According to its legislative history, the purpose of Division 1.6 was to regulate and thereby curtail predatory lending practices that typically occur in the sub-prime mortgage market.⁵ Division 1.6 applies to any "covered loan," which is a "consumer loan in which the original principal balance of the loan does not exceed" $250,000 "in the case of a mortgage or deed of trust," and either of two conditions are met.⁶ (§ 4970, subd. (b)(1)(A), (B).) A "consumer loan" is defined as "a consumer credit transaction that is secured by real property located in this state used, or intended to be used or occupied, as the principal dwelling of the consumer that is improved by a one-to-four residential unit." (§ 4970, subd. (d).) A consumer loan does not include a bridge loan, a reverse mortgage, an open line of credit as defined by federal regulation, or a "consumer credit transaction that is secured by rental property or second homes." (§ 4970, subd. (d).)

Division 1.6 contains numerous prohibitions and limitations with respect to covered loans. For example, a person who originates covered loans shall not (1) "make a covered loan that finances points and fees in excess of" the higher of $1,000 or 6 percent of the original principal balance, exclusive of points and fees (§ 4979.6); (2) "make or arrange a covered loan unless at the time the loan is consummated, the person reasonably believes the consumer ... will be able to make the scheduled payments to repay the obligation based" on specified factors (§ 4973, subd. (f)(1)); (3) "pay a contractor under a home-improvement contract from the proceeds of a covered loan other than by an instrument payable to the consumer," both the consumer and the contractor, or under certain circumstances to a third party escrow agent (id., subd. (g)); (4) "recommend or encourage a consumer to default on an existing consumer loan or other debt in connection with the solicitation or making of a covered loan that refinances all or any portion of the existing consumer loan or debt" (id., subd. (h)); (5) "refinance or arrange for the refinancing of a consumer loan such that the new loan is a covered loan that is made for the purpose of refinancing, debt consolidation or cash out, that does not result in an identifiable benefit to the consumer" after considering various factors (id., subd. (j)); (6) "steer, counsel, or direct any prospective consumer to accept a loan product with a risk grade less favorable than the risk grade that the consumer would qualify for" based on certain information (id., subd. (l)(1)); (7) "finance, directly or indirectly, into a consumer loan or finance to the same borrower within 30 days of a consumer loan any credit life, credit disability, credit property, or credit unemployment insurance premiums, or any debt cancellation or suspension agreement fees, provided that credit insurance premiums, debt cancellation, or suspension fees calculated and paid on a monthly basis shall not be considered financed by the person originating the loan" (§ 4979.7); (8) structure a loan transaction as an open-end credit plan for the purpose of evading Division 1.6 if the "loan would have been a covered loan if the loan had been structured as a closed end loan" (§ 4973, subd. (m)(1)); (9) divide any loan transaction into separate parts for the purpose of evading Division 1.6 (§ 4973, subd. (m)(2)); or (10) "act in any manner, whether specifically prohibited by this section or of a different character [sic], that constitutes fraud" (id., subd. (n)).

Moreover, a covered loan shall not (1) include a "prepayment fee or penalty after the first 36 months after the date of" loan consummation, but "may include a prepayment fee or penalty up to the first 36 months after the date of" loan consummation under certain conditions (§ 4973, subd. (a)); (2) "contain a provision for negative amortization such that the payment schedule for regular monthly payments causes the principal balance to increase, unless the covered loan is a first mortgage" and appropriate disclosure made (id., subd. (c)); (3) "include terms under which periodic payments required under the loan are consolidated and paid in advance from the loan proceeds" (id., subd. (d)); (4) "contain a provision that increases the interest rate as a result of a default" except under certain circumstances (id., subd. (e)); (5) generally "contain a call provision that permits the lender, in its sole discretion, to accelerate the indebtedness" (id., subd. (i)); or (6) be made unless a seven-paragraph disclosure form set forth in section...