Alert October 02, 2012

Federal Court Holds Massachusetts Private Mortgage Insurance Law is Preempted by HOLA

The United States District Court for the District of Massachusetts dismissed a putative class action on grounds that plaintiff’s claims were preempted by federal law. Plaintiff alleged that the bank’s requirement that all borrowers obtain insurance equal to the amount owed on their loans violated a Massachusetts statute forbidding lenders from requiring borrowers to purchase insurance greater than the replacement cost of the property. Plaintiff claimed that he had overpaid for insurance by approximately $500 dollars per year as a result of defendant’s requirement. Defendant responded by arguing that any state law purporting to limit the amount of insurance that a federal savings bank can require is preempted by the Home Owner’s Loan Act.

The Court’s opinion dismissing the case is noteworthy for two reasons. First, the Court denied plaintiff’s motion to remand the case to state court, holding that defendant had established the amount in controversy necessary for federal jurisdiction under the Class Action Fairness Act. In seeking remand, plaintiff argued that only $2.1 million was in controversy, based on his alleged damages and the estimated size of the putative class. The Court rejected this argument, noting that plaintiff sought treble damages under the Massachusetts unfair practices statute, thereby making the theoretical amount in controversy in excess of $6 million—above the CAFA jurisdictional minimum. This ruling presents a satisfying result, and should serve as a reminder to plaintiffs that courts will hold them to the consequences of their pleadings, for better or for worse.

Second, the Court employed a straightforward application of federal preemption in the banking context, holding that the text of HOLA “definitively preempts any state law purporting to impose requirements regarding the ‘ability of a creditor to require or obtain private mortgage insurance, insurance from other collateral or other credit enhancements.’” As a federal savings bank, defendant’s practice of requiring insurance equal to the value of the loan is subject only to the terms of HOLA, making any state laws that would impose additional limitations inapplicable to defendant.