Wednesday, January 30, 2008

Misrepresenting Mortgage Prepayment Credits Could Violate California Consumer Laws

This posting was written by William Zale, Editor of CCH Advertising Law Guide.

Federal banking law and regulations did not preempt state law claims that a mortgage lender misrepresented how it would apply prepayments to principal, and the lender's practices could have violated the California Consumer Legal Remedies Act, False Advertising Act, and Unfair Competition Law, the federal district court in San Francisco has ruled.

Federal Preemption

Consumer protection laws of general application, which merely required all businesses (including banks) to refrain from misrepresentations and abide by contracts and representations to customers, did not impair the exercise of lending powers, the court determined. The state consumer laws only incidentally affected the exercise of powers under the National Banking Act and regulations of the Office of the Comptroller of Currency.

Representations in Documents, Coupons

The lender could have violated the California statutes through misrepresentations in loan documents and monthly payment coupons, according to the court. Contrary to the lender's argument, its monthly statements to existing customers could constitute “advertisements” as statements to the public.

Contrary to the lender’s argument that its representations were not likely to deceive a reasonable consumer, nothing in the payment coupons placed any condition on the lender’s promise to apply undesignated funds to principal. The lender conceded that its practice was to apply undesignated payments to a suspense account until it heard further from the borrower.


The borrower's declaration that he continued to send in payments and was told he would have to send a written request, despite the payment coupon representation was sufficient to raise a triable issue of fact as to reliance. Although the precise nature of the harm suffered was not clear, the borrowed had raised at least a triable issue of fact as to whether he was divested of the use of funds placed into the suspense account until they were applied to his principal, the court found.

The decision is Jefferson v. Chase Home Finance, filed December 14, 2007, CCH State Unfair Trade Practices Law ¶31,519 and CCH Advertising Law Guide ¶62,816.

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