Lewis v. Wells Fargo Bank, N.A.
Filing
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MEMORANDUM OPINION AND ORDER: 1. Defendant Wells Fargo Bank's Motion to Dismiss [Doc. No. 5] is GRANTED; and 2. The Amended Complaint [Doc. No. 2] is DISMISSED WITH PREJUDICE (Written Opinion). Signed by Judge Susan Richard Nelson on 11/4/11. (LPH)
UNITED STATES DISTRICT COURT
DISTRICT OF MINNESOTA
Ann D. Lewis, on behalf of herself and
all others similarly situated,
Civil No. 11-1286 (SRN/FLN)
Plaintiff,
v.
MEMORANDUM OPINION
AND ORDER
Wells Fargo Bank, N.A.,
Defendant.
Richard J. Fuller, Attorney at Law, 400 South Fourth St., Suite 202, Minneapolis,
Minnesota 55415; and Marisa C. Katz, Vildan A. Teske, and William H. Crowder,
Crowder Teske, PLLP, 222 South Ninth St., Suite 3210, Minneapolis, Minnesota 55402;
for Plaintiff.
Charles F. Webber and Ellen B. Silverman, Faegre & Benson LLP, 90 South Seventh St.,
Suite 2200, Minneapolis, MN 55402, for Defendant Wells Fargo Bank, N.A.
SUSAN RICHARD NELSON, United States District Judge
This matter is before the Court on Defendant Wells Fargo Bank, N.A.’s Motion to
Dismiss [Doc. No. 5]. For the reasons discussed in this Court’s Order dismissing Taft v.
Wells Fargo Bank, N.A., Civil No. 10-2084 [Doc. No. 70], and for the reasons stated
below, the Court grants the Motion to Dismiss and dismisses the Amended Complaint
[Doc. No. 2] with prejudice.
I.
FACTUAL AND PROCEDURAL BACKGROUND
Plaintiff Ann D. Lewis entered into a reverse mortgage loan with Defendant Wells
Fargo for her home in Bloomington, Minnesota. She contends that this reverse mortgage
violated several Minnesota statutes, a federal law, and constituted a breach of contract
and unjust enrichment. She also seeks to represent a class of similarly situated
individuals.
Reverse mortgages, or Home Equity Conversion Mortgages (“HECM”), are not an
uncommon way for older people to reap the benefits of the equity they have in their
homes. Congress specifically encouraged reverse mortgages by authorizing the
Department of Housing and Urban Development (“HUD”) to insure such mortgages
through a program administered by the Federal Housing Administration (“FHA”).
Under HUD’s reverse mortgage program, a homeowner over the age of 62 can
receive what is essentially a home equity loan that the homeowner does not have to pay
back. Then, on the sale of the home or the death of the homeowner, the lender is repaid
the amount of the loan with interest, and any remaining equity goes either to the
homeowner or to the homeowner’s estate. The interest on the reverse mortgage is put
back into the principal amount of the loan according to federal law. 24 C.F.R.
§§ 206.25(e), 206.19(e). Thus, for example, an older homeowner whose home is worth
$200,000, and who owns the home free of any encumbrances, can receive a reverse
mortgage for all or a portion of that $200,000, and can receive those proceeds either as a
monthly annuity or a lump-sum payment.
At issue are three types of fees Wells Fargo charged Plaintiff: origination fees,
servicing fees, and mortgage insurance charges. The parties do not dispute that Wells
Fargo charged these fees, or that, rather than paying cash for the fees, Plaintiff opted to
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borrow the money for the fees, so that the amount of the fees was added to the principal
balance of Plaintiff’s reverse mortgage loan. Nor do the parties dispute the amount of the
fees charged, and Plaintiff does not contend that charging such fees was in itself
improper. Rather, the crux of her Complaint is that, by adding these fees to the principal
loan amount, Wells Fargo charged an effective interest rate that was higher than the
parties’ agreement and higher than Minnesota law allows. Plaintiff also contends that
Minnesota prohibits including these types of fees in the principal loan amount. (See Am.
Compl. ¶ 2 [Doc. No. 2]) (“Plaintiff brings this action . . . for Well Fargo’s inclusion of
insurance premiums, excessive servicing fees, loan origination fees, and/or similar
charges in the principal amount of its loans in violation of applicable law.”).)
The Amended Complaint raises five claims. The first two causes of action contend
that Wells Fargo violated Minnesota law by including the charges in the principal balance
of the loan. The third cause of action claims that Wells Fargo breached its contract with
Plaintiff by charging interest in excess of that provided in the loan documents. The fourth
cause of action is a claim of unjust enrichment, and the fifth contends that Wells Fargo
violated the National Bank Act, 12 U.S.C. § 85.
II.
DISCUSSION
A.
Standard of Review
When evaluating a motion to dismiss under Rule 12(b)(6), the Court assumes the
facts in the Amended Complaint to be true and construes all reasonable inferences from
those facts in the light most favorable to Plaintiff. Morton v. Becker, 793 F.2d 185, 187
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(8th Cir. 1986). However, the Court need not accept as true wholly conclusory
allegations, Hanten v. Sch. Dist. of Riverview Gardens, 183 F.3d 799, 805 (8th Cir.
1999), or legal conclusions Plaintiff draws from the facts pled. Westcott v. City of
Omaha, 901 F.2d 1486, 1488 (8th Cir. 1990).
B.
Preemption
The question in this case is whether a state may, in the context of fixing interest
rates that are applicable to a reverse mortgage loan, also define what constitutes interest.
The National Bank Act (“NBA”) allows national banks to charge their customers interest
at the rate allowed by the state in which the bank is located. 12 U.S.C. § 85; Smiley v.
Citibank (South Dakota), N.A., 517 U.S. 735 (1996). There is no dispute that, because of
the interplay between the National Housing Act (“NHA”), the National Bank Act, and the
regulations promulgated under both laws, a state may determine what rate of interest may
be charged by a bank offering a federally insured reverse mortgage loan. The dispute is
whether the state may also determine what charges are defined as interest.
1.
Preemption Opt-Out
Plaintiff contends that the Court need not determine whether any of the state
statutes on which the Second Amended Complaint relies are preempted because the
parties have opted out of any possible federal preemption.
a.
The Agreements
Plaintiff’s first argument is that the parties have “opted out” of any possible
preemption because the choice-of-law provision in the loan agreement provides that the
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parties’ contract will be governed by Minnesota law. But the choice-of-law provision on
which Plaintiff relies does not choose solely Minnesota law. Rather, that provision states
that the agreement will be governed by “Federal law and the law of the jurisdiction in
which the Property is located.” (Loan Agreement § 6.4, at WF20 [Doc. No. 8-1].) Thus,
even assuming that the parties could contract out of federal preemption,1 the choice-oflaw provision cannot be used to avoid a preemption analysis.
b.
State Opt-Outs under the NHA
Plaintiff next argues that Minnesota has opted out of the National Housing Act, so
that the regulations allowing banks to include the disputed charges in the principal
amount do not apply in Minnesota. The NHA sets limits on “the amount of interest which
may be charged” by a bank in a real estate transaction under the NHA, and provides that
state laws purporting to limit “the amount of interest which may be charged” do not apply
to NHA mortgages. 12 U.S.C. § 1709-1a(a). However, the NHA allows states to opt out
of this limitation, by enacting a law after June 30, 1976, expressly limiting “the amount of
interest which may be charged.” Id. § 1709-1a(b).
Plaintiff contends that Minnesota has, on four occasions, opted out of the NHA’s
interest-rate limits. Minn. Stat. §§ 47.203, 47.58, 47.59, and 48.195. Indeed, § 47.58
specifically addresses the interest rate allowed for reverse mortgage loans. Id. § 47.58,
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This is a doubtful proposition. See, e.g., Volt Info. Sciences, Inc. v. Bd. of
Trustees of Leland Stanford Jr. Univ., 289 U.S. 468, 490 (1989) (Brennan, J., dissenting)
(“Choice-of-law clauses simply have never been used for the purpose of dealing with the
relationship between state and federal law.”)
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subd. 5.2 Further, Plaintiff argues, by opting out of the NHA’s interest-rate limits,
Minnesota has also interposed the right to determine on what types of fees and charges
banks may charge that state-prescribed interest rate. According to Plaintiff, Minnesota
has defined what constitutes principal and what constitutes interest, so that charges such
as those at issue—mortgage insurance charges, servicing fees over $50 per year, and
origination fees—cannot be added to the principal of mortgage loans and interest charged
thereon. Id. § 47.59, subd. 6.
Plaintiff’s interpretation of the NHA opt-out provision is overbroad. The NHA
specifically allows states to opt out of the NHA’s interest rate, or “the amount of interest
which may be charged.” 12 U.S.C. § 1709-1a(b). It does not purport to allow states to
opt out of all NHA regulations, and such a reading of the statute leads to absurd results.
As discussed above, the NHA made reverse mortgage loans possible. It would be
illogical for Congress to authorize banks to enter into reverse mortgage loans pursuant to
strict national standards but then allow each state to set its own requirements for what
may be included or not included in the principal balance of those loans. Moreover,
Plaintiff points to no statute or regulation that recognizes a state’s right to opt out of all
NHA regulations, and the Court has found none. The Court will not define the statute’s
statement regarding “the amount of interest” to also include “the definition of what
constitutes interest.” Plaintiff’s contention that Minnesota has opted out of federal
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This section sets the maximum interest rate for reverse mortgage loans at three
percentage points above the posted yield on 30-year conventional fixed-rate mortgages or
15.75%, whichever is less. See Minn. Stat. § 47.20, subd. 4a.
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preemption is without merit.
c.
National Bank Act
Plaintiff’s final argument regarding preemption is that the National Bank Act
allows national banks to choose to be governed by state interest rate limits, 12 U.S.C.
§ 85, and that, having done so, Wells Fargo is bound not only by those state interest rate
limits but by the state definitions of interest. (Pl.’s Opp’n Mem. at 6.) As discussed more
fully below in the context of Plaintiff’s breach of contract claim, the parties disagree
about the relevant interest rate to which Wells Fargo is bound to comply. According to
Plaintiff, Minnesota caps the interest rate on transactions such as this reverse mortgage
loan at 7%. Minn. Stat. § 48.195. Wells Fargo contends there is no limit on the rate of
interest under Minnesota law. Minn. Stat. § 334.01, subd. 2.
Whatever the pertinent interest rate is, however, Plaintiff cannot establish that the
fact that the NBA allows a bank to choose a state interest rate means that the bank must
also be bound by how that state defines interest. Congress intended for the NBA to have
the broadest possible preemptive sweep, and thus this Court is bound to view every state
requirement that purports to regulate national banks with the scepticism the NBA’s
preemptive scope requires. But even aside from the strong presumption of preemption in
the NBA, the regulations make clear that “the limitations on charges that comprise rates
of interest on loans by national banks are determined under federal law.” 12 C.F.R.
§ 34.4(a) n.1. In other words, states may prescribe interest rates, but state law does not
govern the definition of interest for national banks under the NBA. Plaintiff’s contention
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that Wells Fargo must be bound by state definitions of interest because it chose to be
bound under the NBA’s state interest-rate provision is without merit.
2.
Preemption Analysis
Having determined that the parties have not opted out of the preemption analysis,
the Court must now determine whether the state statutory provisions on which Plaintiff
relies are preempted by federal law.
As an initial matter, and as discussed briefly above, there can be no doubt that
Congress intended the NBA to displace state laws purporting to regulate a national bank’s
liability for alleged overcharges. See Beneficial Nat’l Bank v. Anderson, 539 U.S. 1, 10
(2003) (“Uniform rules limiting the liability of national banks and prescribing exclusive
remedies for their overcharges are an integral part of a banking system that needed
protection from ‘possible unfriendly State legislation.’”) (quoting Tiffany v. Nat’l Bank
of Mo., 85 U.S. (18 Wall.) 409, 412 (1873)). Indeed, the purpose of the NBA, in part,
was to limit the exposure of national banks “to the hazard of unfriendly legislation by the
States.” Tiffany, 85 U.S. at 413. Thus, the NBA is one of the few federal statutes
considered to completely preempt the field. Beneficial, 539 U.S. at 10-11. It is within
this strong preemptive framework that the Court must analyze the various federal
regulations and state statutes at issue in the context of Plaintiff’s claims under those
statutes.
Federal regulations require the payment of a mortgage insurance premium of 2%
of the loan amount at the time of closing. 24 C.F.R. §§ 206.105(a); 206.103. The
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regulations contemplate the borrower either borrowing the money for this initial
insurance premium payment, in which case that money logically would be added to the
principal balance, or making the payment in cash. Id. § 206.25(a). The regulations
further specify that a monthly mortgage insurance premium payment “shall be added to
the mortgage balance.” Id. § 206.105(b). The terms of the loan agreement specified that
Plaintiff would borrow the initial mortgage insurance premium amount from Wells Fargo,
and that Wells Fargo would then include the amount in the principal balance of the loan.
(Loan Agreement §§ 1.2, 1.6.)
Wells Fargo also charged Plaintiff an origination fee, which federal law allows to
be paid either in cash “or through an initial payment under the mortgage.” 24 C.F.R.
§ 206.31(a)(1). Thus, Wells Fargo included the amount of the origination fee in the
principal balance. Finally, Wells Fargo charged a servicing fee of $35 per month
pursuant to federal regulations. Id. § 206.207(b). This regulation requires that the
amount of the servicing fee be “set aside as a portion of the principal limit.” Id.
Minnesota law, on the other hand, sets forth what “additional charges may be
included in the principal amount of the loan.” Minn. Stat. § 47.59, subd. 6. That
subdivision does not allow including mortgage insurance such as that at issue here in the
principal amount of the loan. See id. subd. 6(a)(6) (allowing “charges for other benefits,
including insurance, conferred on the borrower . . .” to be included in the loan’s principal
amount). The subdivision also prohibits including more than $50 per year in servicing
fees. Id. subd. 6(c)(1). Plaintiff further contends that the Minnesota statutory framework
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depends on common-law definitions of interest, and that the common law defines charges
such as origination fees, servicing fees, and mortgage insurance premiums as interest.
Plaintiff argues that the Court must apply Minnesota’s definition of interest
because the parties have not made a written election to apply other statutes. Minnesota
law provides that a bank may elect to “make an extension of credit” under other statutory
authority, but must “specify in the promissory note, contract, or other loan document the
section under which the extension of credit is made.” Minn. Stat. § 47.59, subd. 2.
There is no dispute that Wells Fargo did not specify any applicable Minnesota statute in
the loan documents here.
The NBA regulations provide:
Except where made applicable by Federal law, state laws that obstruct,
impair, or condition a national bank’s ability to fully exercise its Federally
authorized real estate lending powers do not apply to national banks.
Specifically, a national bank may make real estate loans . . . without regard
to state law limitations concerning . . . [r]ates of interest on loans.
12 C.F.R. § 34.4(a)(12). Plaintiff attempts to limit the preemptive scope of this section by
focusing on the introductory statement: “[e]xcept where made applicable by Federal law.”
According to Plaintiff, this introduction should be read to mean that where other federal
laws allow the incorporation of state laws regarding such things as interest rates and what
constitutes interest, the preemptive sweep of § 34.4 does not apply. But even if state
interest rates constituted something “made applicable by federal law,” the regulation
clearly prohibits state definitions of interest from applying to national banks: “The
limitations on charges that comprise rates of interest on loans by national banks are
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determined under Federal law.” Id. § 34.4(a)(12) n.1.
Plaintiff points to another regulation as ostensibly allowing the states to define
what constitutes interest. 12 C.F.R. § 7.4001 defines “interest” and provides that the
“Federal definition of the term “interest” in paragraph (a) of [§ 7.4001] does not change
how interest is defined by the individual states . . . solely for purposes of state law.” Id.
§ 7.4001(c). Plaintiff insists that this provision means that state definitions of what
constitutes interest apply to the loans at issue here. But given § 34.4(a)(12)’s express
preemption of state definitions of interest, such a reading of § 7.4001(c) would be strange
indeed. The preemptive scope of § 34.4(a) is clear: all state laws purporting to regulate
the rates of interest, and specifically state laws that purport to limit charges “that
comprise rates of interest,” are preempted by federal law. Id. § 34.4(a)(12) n.1.
Accordingly, Plaintiff’s claims that Wells Fargo violated state laws and the
National Bank Act by including payments for mortgage insurance, origination fees, and
servicing fees in the principal balance of her reverse mortgage loan must be dismissed.
C.
Breach of Contract
Plaintiff contends that Wells Fargo breached the parties’ contract by charging
more interest than the agreement allowed. To the extent her argument on this point
requires the Court to adopt the Minnesota definition of what can be included in the
principal balance of the loan, however, the breach of contract claim fails. The contract
provided that Wells Fargo would include the fees at issue here in the principal balance of
Plaintiff’s reverse mortgage loan. Wells Fargo complied with all of those terms and
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Plaintiff’s breach of contract claim fails.
Plaintiff also contends that a document she received, entitled “Final Loan Terms,”
reflect an “expected/fully indexed” interest rate of 5.26%, which is significantly higher
than the 2.723% to which the parties agreed. (App. at WF57 [Doc. No. 8-1].) However,
the parties did not agree to a static interest rate of 2.723%. Rather, the parties agreed to
an initial interest rate of 2.723% that would change monthly thereafter, not to exceed
12.723%. (See id. at WF22 (Adjustable Rate Note) ¶ 2 (“Interest will be charged on
unpaid principal at the rate of [2.723%] per year . . . . The interest rate may change in
accordance with Paragraph 5 of this Note.”); id. ¶ 5 (providing for maximum interest rate
of 12.723%) [Doc. No. 8-1].) Plaintiff is therefore incorrect as to what the contract
required.
Plaintiff also argues that the 5.26% rate disclosed in the Final Loan Terms is
higher than the initial index rate (2.723%) to which the parties agreed in the Note itself.
At the Court’s request, the parties submitted additional briefing on the issue. [Doc. Nos.
15, 18.] Wells Fargo explained that the “expected/fully indexed” rate in the Final Loan
Terms is a HUD-required disclosure, 24 C.F.R. § 206.3, representing the lender’s
estimate of what the average future index rate will be on the reverse mortgage using
widely accepted interest-rate benchmarks. (Def.’s Mem. at 3 [Doc. No. 15].) Wells
Fargo also notes that there can be no “effective” rate of interest for Plaintiff’s loan.
Because the interest on the loan adjusts monthly according to industry benchmarks that
are not predictable in advance, and because her reverse mortgage loan accrues more
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interest-bearing principal over the life of the loan, it is impossible to predict with any
accuracy the actual rate of interest she will be charged. (Id. at 2-3.)
Plaintiff’s response to this argument is that it should be possible to predict an
effective interest rate, just as it is possible to convert a monthly interest rate into an
annual rate. (Pl.’s Mem. at 2 [Doc. No. 18].) But this argument misses the point. It is
possible to convert a known monthly rate into an annual rate. It is not possible to convert
an unknown, or adjustable, monthly rate, such as that used to calculate Plaintiff’s future
loan balances, into an annual rate. The best the lender can do is offer an expected rate,
i.e., what the lender expects the average interest to be over the life of the loan, based on
the interest rate margin and current industry benchmarks.
Plaintiff has not established that Wells Fargo breached its contract with her by
charging more interest than the contract allowed. Her breach of contract claim fails.
D.
Unjust Enrichment
Under Minnesota law, where there is an express contract, no claim for unjust
enrichment is cognizable. “[E]quitable relief cannot be granted where the rights of the
parties are governed by a valid contract.” U.S. Fire Ins. v. Minn. State Zoological Bd.,
307 N.W.2d 490, 497 (Minn. 1982). Plaintiff’s only argument that the contract is invalid
is that the contract allowed Wells Fargo to include fees in the principal amount in alleged
violation of state law. But that argument is without merit, and the presence of a valid
agreement therefore precludes a claim for unjust enrichment. This claim is dismissed.
E.
Conclusion
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Plaintiff has failed to plausibly allege that Wells Fargo violated state or federal
law. Her Amended Complaint must be dismissed.
III.
ORDER
Based on the foregoing, and all the files, records and proceedings herein, IT IS
HEREBY ORDERED that:
1.
Defendant Wells Fargo Bank’s Motion to Dismiss [Doc. No. 5] is
GRANTED; and
2.
The Amended Complaint [Doc. No. 2] is DISMISSED WITH
PREJUDICE.
LET JUDGMENT BE ENTERED ACCORDINGLY.
Dated: November 4, 2011
s/Susan Richard Nelson
SUSAN RICHARD NELSON
United States District Judge
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