The United States District Court for the Southern District of West Virginia revised its prior analysis, finding some but not all of plaintiffs’
    claims of unconscionability preempted by the national Bank Act (NBA) and implementing regulations. Watkins v. Wells Fargo Home Mortgage, 2008 WL 4838731 (S.D. W. Va. Nov. 5, 2008).

    Plaintiffs obtained loans from defendant Wells Fargo that included an adjustable rate provision permitting the interest rate to vary over the course of the loan up to 12.625%. Plaintiffs filed suit alleging unconscionability based on the loan terms. Plaintiffs argued that a national bank is subject to the long standing contract principle of unconscionability. Defendant responded that plaintiffs’ claims are preempted by federal law. In August, the court found that plaintiffs’ claims of unconscionability were preempted based on either field preemption or conflict preemption. Watkins v. Wells Fargo, 2008 WL 2490306 (S.D. W. Va. June 19, 2008). The court subsequently granted plaintiffs’ motion to amend and revise its analysis of field and conflict preemption. Watkins v. Wells Fargo Home Mortgage, 2008 WL 4838731 (S.D. W. Va. Nov. 5, 2008).

    The court explained that in its order of June 19, 2008, it had determined that Congress had left no room for state regulation and that field preemption therefore applied. In its November decision the court reversed its position, finding that field preemption does not apply to the activities of national banks because the United States Supreme Court, the relevant federal regulations and the Office of the Comptroller of the Currency all clearly envision some role, even if a limited one, for state regulation of national banks. The court determined that a “more targeted approach,” allowing for state laws that do not “obstruct, impair or condition” a national bank’s powers, was appropriate.

    Under this more targeted approach, the court explained that plaintiffs allege that the inducement to contract is unconscionable for three different reasons: (i) the agreements involve ARMs, (ii) defendant does not consider borrowers’ ability to repay and (iii) defendant suppresses (in the inducement process) the realities of future payment after reset. The court found the first allegation preempted, but not the second and third allegations. The court concluded that 12 C.F.R. § 34.3(b) permits national banks to “use any reasonable method to determine a borrower’s ability to repay,” but that plaintiffs’ complaint does not ask the court to declare unreasonable any particular method sanctioned by the regulations, rather, plaintiffs argue that defendant employs no method in determining ability to repay. The court found that because plaintiffs do not attempt to impose some regulation inconsistent with the federal regulation, conflict preemption does not apply. The court found that plaintiffs’ third allegation claims that defendant suppresses “the realities” of repaying the loan, namely, that “defendant makes such ARM loans with the belief that there is no reasonable probability of payment in full of the obligation.” The court concluded that while 12 C.F.R. §§ 34.4(a)(9) and 226.19(b) govern the disclosures that accompany the type of loan extended to plaintiffs, neither authorizes a national bank to make a loan that it knows the borrower cannot repay. Thus, the court held the claim is not preempted.

    The court held that plaintiffs allegations that defendant misrepresented that certain finance charges were principal, thereby making interest charges higher than represented were not preempted, as no federal law permits a national bank to misrepresent to borrowers the nature of its charges. The court held that plaintiffs’ claim that defendant used a list of appraisers that provided “bogus appraisals needed to originate inflated loans with unsuspecting consumers” is not preempted by federal regulations governing appraisal standards as the claims do not go to appraisal methodology governed by the regulations.

    In the interest of avoiding further delay, the court applied its revised preemption analysis to the amended complaint and permitted the action to proceed. The case illustrates the uncertainty that exists in regard to preemption of state law claims of unconscionability.

    Elizabeth Anstaett and Mike Tomkies