National Bank Act Preempts Application of State Law to a Prepayment Penalty in Loan Agreement
April 7, 2006
Michael Weissman - Chicago
On November 18, 2000, Douglas and Ellyn Dannewitz obtained a mortgage loan from HomeGold, a South Carolina corporation. The mortgage stipulated it would be “governed by federal law and the law of the jurisdiction in which the property is located” (in this case, Illinois).
Equicredit Corporation of America – a wholly-owned subsidiary of Bank of America which was incorporated in Delaware, headquartered in Florida and did business in Illinois – purchased the loan from HomeGold.
The mortgage note required a penalty to be paid if the loan were repaid within 60 months, as permitted by state law.
In June 2001, Mr. and Mrs. Dannewitz wanted to sell their home. They obtained a payoff letter and, for the first time, learned that they had to pay a penalty of $9,354.32. They thereupon sued Equicredit under the Illinois Interest Act (815 ILCS 205/4 et seq) and the Illinois Consumer Fraud Act (815 ILCS 505/1 et seq). Dannewitz v. Equicredit Corporation of America, 839 N.E. 2d 1060 (Ill. App. 1st Dist. 2005).
Equicredit defended the lawsuit by asserting that the Dannewitz’s claims were preempted by the National Bank Act. In that context, the Supreme Court has ruled that, in the case of a national bank, (a) although the National Bank Act defines what constitutes usury, state law establishes the maximum rate, and (b) the Act supersedes “both the substantive and remedial provisions of state usury laws and create(s) a federal remedy for overcharges that is exclusive.” (Beneficial National Bank v. Anderson, 539 U.S. 1 (2003)).
The Dannewitzes tried to argue that the Beneficial case was not controlling because Equicredit was a subsidiary of a national bank rather than a national bank itself. But the court would have none of that. Federal law preempted the applicability of the Illinois statutes.
What’s the Point?
The Dannewitz case is another recent case in which federal preemption has been challenged. Thus far, these challenges have generally been unsuccessful.
For more information, e-mail Michael L. Weissman at michael.weissman@hklaw.com or call toll free, 1-888-688-8500.