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Mortgage Refinance Fee Limits

In a victory for consumer advocates and the state, a federal appellate court ruled Friday that California’s limits on mortgage interest charges are not preempted by federal law.

The ruling reverses a decision made more than two years ago by U.S. District Judge Garland E. Burrell Jr. in Sacramento. He found that California’s so-called “per diem” statute is preempted by the federal Depository Institutions Deregulation and Monetary Control Act of 1980.

On the other hand, the three-judge panel of the 9th U.S. Circuit Court of Appeals on Friday affirmed another part of Burrell’s decision that said the federal National Bank Act preempts state regulation of Wells Fargo Home Mortgage because it was a wholly owned operating subsidiary of a nationally chartered bank. The state’s per-diem statute restricts mortgage interest to no more than one day before a deed is recorded.

The state Department of Corporations demanded in 2002 that Wells Fargo Home Mortgage, based in Des Moines, Iowa, audit tens of thousands of loans to find possible overcharges and refund the money to customers. Previously, the state recovered millions in refunds from other mortgage lenders, but Wells Fargo sued.

Corporations Department spokeswoman Susie Wong said Friday that the ruling appears to be a nullity with respect to Wells Fargo. She added that Wells Fargo Home Mortgage has since been absorbed into Wells Fargo Bank, over which the state has no regulatory authority.

But, she stressed, “any lender which is not an operating subsidiary of a nationally chartered bank must comply with the per diem-statute.” Friday’s opinion was written by Circuit Judge Marsha S. Berzon, with concurrence from Judge Stephen Reinhardt and Judge Richard A. Paez.

In rejecting federal pre-emption on the mortgage interest question, the appeals panel relied heavily on a 1996 opinion of the Boston-based 1st Circuit Court of Appeals. That opinion emphasized that the federal statute cited by Burrell “is concerned with only the ‘rate’ and ‘amount’ of interest charged when refinancing a mortgage, not with other features of the interest calculation.”

In the California statute, “the only direct restriction was on the time for which interest may be charged on a mortgage, not on the rate that may be charged when interest is in effect, or the total amount of interest that may be charged over the life of the loan,” Berzon wrote.

She wrote that, as the 1st Circuit pointed out, the federal statute preempts only “express” limitations on rates and amounts of mortgage interest.

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