Illinois Appellate Court Holds That Illinois Interest Act Is Preempted By Federal Law For Mortgage Lenders That Are Federal Thrifts
September 4, 2005. In Van Der Molen v. Washington Mutual Finance, Inc., 2005 Ill.App. LEXIS 445, the Illinois Appellate Court (First District) held that a federal thrift was not subject to the Illinois Interest Act's prohibition (found at 815 ILCS 205/4(1)(L) against pre-payment penalties where the loan's interest rate exceeds 8%. The court reached this conclusion by determining that the Office of Thrift Supervision, the entity that regulates federal savings associations, had intended to occupy the entire field of lending regulation. Because that was the case, federal savings associations may extend credit as authorized under federal law without regard to state laws purporting to regulate or otherwise affect their credit activities.
The Appellate Court went on to determine that prepayment penalties are among the "nonexhaustive list of the types of state laws preempted because they are loan related fees." Also included on the "nonexhaustive" list of preempted state regulations are state provisions that govern the adjustment of interest rates.
Mortgagors frequently allege violations of section 4(1)(L) of the Illinois Interest Act as a means of defending against foreclosure actions. This victory for federal savings associations should bring an end to these kinds of allegations against federal lenders in Illinois. It should also be noted that the Illinois Supreme Court, as of this writing, is currently reviewing the issue of whether section 4(1)(L)'s limitation on prepayment penalties and other charges where the interest rate of the loan exceeds 8% remains a part of the statute in light of a 1981 amendment to the Act which provides that a lender may charge any rate of interest on loans secured by a mortgage on real estate. While state courts have been reluctant to hold that the 1981 amendment to the Act impliedly repealed section 4(1)(L), federal courts have repeatedly reached that result. See Currie v. Diamond Mortgage Corp. of Illinois, 859 F.2d 1538 (7th Cir. 1988) and Spann v. Community Bank of Northern Virginia, 2004 U.S. Dist LEXIS 5148. The Illinois Supreme Court heard oral argument on this issue in May 2005, in the case of US Bank v. Clark. We will report the Illinois Supreme Court's ruling on this issue when it is announced.
September 4, 2005. In Van Der Molen v. Washington Mutual Finance, Inc., 2005 Ill.App. LEXIS 445, the Illinois Appellate Court (First District) held that a federal thrift was not subject to the Illinois Interest Act's prohibition (found at 815 ILCS 205/4(1)(L) against pre-payment penalties where the loan's interest rate exceeds 8%. The court reached this conclusion by determining that the Office of Thrift Supervision, the entity that regulates federal savings associations, had intended to occupy the entire field of lending regulation. Because that was the case, federal savings associations may extend credit as authorized under federal law without regard to state laws purporting to regulate or otherwise affect their credit activities.
The Appellate Court went on to determine that prepayment penalties are among the "nonexhaustive list of the types of state laws preempted because they are loan related fees." Also included on the "nonexhaustive" list of preempted state regulations are state provisions that govern the adjustment of interest rates.
Mortgagors frequently allege violations of section 4(1)(L) of the Illinois Interest Act as a means of defending against foreclosure actions. This victory for federal savings associations should bring an end to these kinds of allegations against federal lenders in Illinois. It should also be noted that the Illinois Supreme Court, as of this writing, is currently reviewing the issue of whether section 4(1)(L)'s limitation on prepayment penalties and other charges where the interest rate of the loan exceeds 8% remains a part of the statute in light of a 1981 amendment to the Act which provides that a lender may charge any rate of interest on loans secured by a mortgage on real estate. While state courts have been reluctant to hold that the 1981 amendment to the Act impliedly repealed section 4(1)(L), federal courts have repeatedly reached that result. See Currie v. Diamond Mortgage Corp. of Illinois, 859 F.2d 1538 (7th Cir. 1988) and Spann v. Community Bank of Northern Virginia, 2004 U.S. Dist LEXIS 5148. The Illinois Supreme Court heard oral argument on this issue in May 2005, in the case of US Bank v. Clark. We will report the Illinois Supreme Court's ruling on this issue when it is announced.