Today's Trends in Credit Regulation

Massachusetts Predatory Home Loan Practices Act Preempted
By Dana Frederick Clarke

With all of the recent focus on preemption under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, the U.S. Bankruptcy Court for the District of Massachusetts offered up an interesting preemption decision concerning Massachusetts’s Predatory Home Loan Practices Act under an old favorite, the federal Truth in Lending Act.

In 2006, James and Lynn Hollingworth obtained a mortgage loan from Champion Mortgage, a division of Keybank National Association. Champion later assigned the loan to Beneficial Massachusetts, Inc. When the Hollingworths filed for bankruptcy protection under Chapter 13 of the Bankruptcy Code, HSBC Mortgage Corporation filed a proof of claim on behalf of Beneficial. The Hollingworths filed an adversary complaint against Beneficial and HSBC, alleging that the loan was unenforceable.

The Hollingworths argued that the state’s PHLPA requires lenders to receive certification that their borrowers received counseling prior to closing high-cost home mortgage loans, defined under the Act as loans having points and fees that exceed 5% of the total financed amount. They alleged that Champion failed to obtain such certification of counseling prior to closing their loan, for which the points and fees totaled 6.6%.

Although the Hollingworths claimed that Champion was neither a national bank nor a division of a national bank, the court took notice that the promissory note they signed was payable to “Champion Mortgage, a division of Keybank National Association, a national bank organized and existing under the laws of the United States.” The court made several references to the fact that having the word “national” in the bank’s title is “virtually conclusive evidence that the bank is federally chartered.” Needless to say, the court made short work of finding Champion a division of a federally chartered bank.

The court then moved on to consider Beneficial and HSBC’s motion for summary judgment in which they argued that Keybank, as a national bank, was not subject to the requirements of the PHLPA. Specifically, Beneficial and HSBC argued that because TILA establishes an 8% points and fees threshold for the determination of what loans may be classified as “high cost,” TILA preempts state laws that classify loans as high cost under lower thresholds, such as the 5% established by the PHLPA. The court agreed.

The court explained that TILA expressly provides that state laws that are inconsistent with its provisions are preempted to the extent of the inconsistency. Additionally, the court observed that the Office of the Comptroller of the Currency has the authority to issue opinion letters or interpretive rules concluding that federal law preempts the application of any state consumer protection or fair lending statute as to a national bank. The court found it noteworthy that the OCC had previously issued a preemption order concluding that the Georgia Fair Lending Act’s classification of high cost loans is preempted by TILA as to national banks.

Not to be defeated so easily, the Hollingworths argued that TILA is not inconsistent with Massachusetts law because the Federal Reserve Board exempted certain Massachusetts credit transactions from the requirements of TILA. Although the court acknowledged the exemption for certain credit transactions, the court explained that the exemption does not apply to federally chartered institutions, such as Keybank. Therefore, the court concluded that, as to a federally chartered bank, Massachusetts’s classification of high cost loans under its high cost lending statute is preempted by TILA.

In re Hollingworth (Hollingworth v. Beneficial Massachusetts, Inc.), 2011 Bankr. LEXIS 2829 (Bankr. D. Mass. July 27, 2011).

Dana Frederick Clarke is a partner in the California office of Hudson Cook, LLP. Dana can be reached at 714-263-0427 or by email at

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